The greenback took another sharp leg lower yesterday following the non-manufacturing ISM PMI which followed the manufacturing reading on Tuesday is surprising to the downside. While the manufacturing index declined further into contractionary territory on Tuesday, yesterday’s release saw the non-manufacturing sector merely grow at a slower rate. However, the 52.6 reading was the lowest since August 2016. The employment index hit its lowest point since February 2014 after a drop from 53.1 to 50.4 in September. The reading is consistent with payroll growth of around 50,000 jobs in a few months’ time, but the ISM sub-index has consistently overstated job growth in 2019, suggesting a zero Nonfarm payroll release may not be far away. All in all, this week’s data not only dented the US dollar but also expectations of the Fed holding rates at the end of the month. The market now prices an 83.2% probability of a rate cut on the 30th October, sharply higher than the 70% probability priced in on Wednesday and 40% probability at the start of the week. Weakening soft data this week doesn’t suggest that the recent rate cuts by the Fed have “maintained the expansion” and puts increasing pressure on US-China trade talks next week. Talking of pressure, today’s Nonfarm Payroll release is pivotal for how the dollar ends the weak. Many have called the demise of the dollar from elevated levels this year, amidst heightened US-China trade tensions and deteriorating US data, but the US labour market defied such stance. Labour market tightness and underlying wage growth have eased fears in the past quarters but this seems like an unsustainable trend as the US economy slows with increasing trade and supply chain pressures. If today’s labour market data at 13:30 begins to falter, this afternoon could result in the dollar finishing a difficult week by taking another leg lower. A 145,000 job increase and 0.2% MoM earnings growth is the median forecast supplied to Bloomberg.
Sterling rallied again yesterday despite comments from the EU suggesting the proposed 2 borders 4 years plan will be knocked back. Three EU diplomats at the EU chief negotiator’s briefing said that Michel Barnier is wrestling with the question of whether the prime minister is serious about a deal. However, PM Johnson looks to have backed away from his stance that this is the final offer, as reports emerge a plan B is on the table. The plan B is the Irish backstop agreement, as negotiated by Theresa May, but with a time limit attached – something the former Prime Minister failed in achieving with the EU. Options markets are bullish, however, with two-week risk reversals, which encompasses the EU summit on Brexit on October 17-18, trading at their highest level since May. Option market sentiment has previously been a good gauge of Brexit sentiment in the market and currently suggests the pound’s rally may not fade in the coming weeks. That being said, there are still a lot of dynamics in play as the October deadline, and the deadline for the Benn bill, draw ever closer.
The euro took advantage of yesterday’s dollar weakness, but was not among the biggest gainers in the G10, for example weakening slightly against sterling. Euro news flow was relatively subdued, with Brexit and Trump’s impeachment grabbing the attention of international media. However, final readings for Services Purchasing Managers Indices for September were released, and pained an almost unrelentingly grim view of the Eurozone economy, with the Eurozone wide index falling to 51.6. The Composite Output index, which is designed to track Eurozone wide Gross Domestic Product Growth, fell to just 50.1, barely above the stagnation level. The release accompanying the index noted that Germany appeared to have slipped into contraction for the first time since 2013, while growth weakened in Ireland and Spain. Eurozone Producer Prices fell 0.5% in August, while Retail Sales expanded 0.3%.
The loonie was once again at the bottom of the G10 currency board this week despite the USD depreciating across the board following another negative surprise in PMI data. The catalyst for loonie weakness has been the fall in oil prices this week. WTI crude has shed $4 in the first 4 days this week as fears of slowing global demand rose. The fact that US crude production also reached record highs, as reported by the EIA on Wednesday, hasn’t helped matters. The loonie continues to get dragged lower by crude prices, but with oil in the green this morning, could today be the day the loonie claws back some of this week’s losses?