- Encouraging ISM data bring dollar back to life, Wall Street sets new records
- Europe enters deflation, ECB chief economist throws first jab at the euro
- Today: ADP jobs report and lots of central bank speakers
US manufacturing data give dollar the kiss of life
A strong batch of US manufacturing numbers resurrected the dollar from the ranks of the dead and propelled Wall Street to another record high yesterday. The ISM manufacturing index jumped to its highest level in almost two years, turbocharged by a surge in new orders, which spells good news for economic activity in the coming months.
The dollar’s revival likely contained technical elements as well. Euro/dollar retreated after hitting the elusive $1.20 handle, so some profit-taking may have been at play, especially considering the record long speculative positioning on the euro. What is striking is that the greenback managed to recover despite some dovish remarks from the Fed’s Brainard and despite the cheerful mood in equity markets.
Looking ahead, whether the dollar manages to build on this recovery will depend mainly on Friday’s US employment report. Even in case of a stellar report though, it is difficult to envision anything more than a short-term rebound. The dominant market themes right now are the dovish Fed and fears that inflation may be around the corner. In this environment, only a serious risk-off episode might be able to turn the dollar’s fortunes around in a sustainable manner.
Will the ECB talk down the euro?
Something that flew under the market's radar yesterday was that the euro area officially fell into deflation in August. The yearly inflation rate fell below zero, and while the core rate remained positive, it still fell way short of forecasts.
This has profound implications for markets. Under its worst-case scenario forecasts, the ECB still envisioned inflation remaining positive this year. The central bank will therefore be under immense pressure to act again soon, even if verbally, to calm investors’ concerns about a prolonged deflationary episode.
This also comes back to the euro. The single currency’s latest spike higher threatens to kneecap imported inflation even further, so policymakers might become more vocal about the exchange rate when they meet next week. We got a first taste of that from the ECB’s chief economist yesterday, who said that the exchange rate “does matter” for policy.
Even if the ECB does not jawbone the euro right now, the higher the single currency goes, the more vocal the ECB will become. Hence, while euro/dollar at $1.20 might be ‘acceptable’, if the pair threatens a breakout towards $1.25, the ECB will likely become more forceful, slowing down the uptrend.
RBNZ lifts the kiwi, central bank speakers in focus
Elsewhere, the kiwi received a boost today after RBNZ Governor Orr said he is not concerned about the exchange rate. That's an abrupt change in tune from a few weeks ago, when the RBNZ signaled very explicitly it would like a lower kiwi.
Admittedly though, investors may be missing the forest for the trees, as in the same speech Governor Orr noted that future QE packages may also include purchases of foreign assets, which is a recipe for killing a currency.
As for the rest of today’s highlights, the ADP jobs report will give us a sense of what to expect from Friday’s official employment data. However, note that the ADP has been a poor predictor of the NFP lately.
Finally, we will hear from BoE Governor Bailey at 13:00 GMT, from deputy Governor Broadbent at 14:30 GMT, and from chief economist Haldane at 15:30 GMT. In the US, New York Fed president Williams will deliver remarks at 14:00 GMT.