Dollar Demand Vanishes on Ugly Data

With the exception of euro and sterling, all of the major currencies traded lower today against the greenback with the Australian dollar lead the slide. The Reserve Bank of Australia cut interest rates for the third time this year to a record low of 0.75% but the big story is the near term top in greenback. The US dollar started the NY session firm against all major currencies and at multi-year highs versus the euro but it u-turned after ISM. According to the latest report, factory activity hit its weakest level in 10 years. Manufacturing activity contracted for the second month in row with the index slipping to 47.8 from 49.1. This deterioration raises concerns about how weaker global growth is affecting the US economy and by extension the labor market. Although manufacturing employment is a separate line item in Friday’s jobs report, the fact that the employment index dropped to its lowest level since 2016 is a red flag for the economy and jobs. We’ll know more when the service sector report is released on Thursday but for now today’s report changed the course for the dollar by setting expectations for a soft release. Aside from the pullback in the dollar, Treasury yields turned negative and the Dow tumbled more than 300 points. If Wednesday’s ADPWealth Strength IndexAAPL is Extremely Up and trending Up report misses expectations, we could see a more significant sell-off that could drive USD/JPY below 107.50.

Thanks to the decline in the dollar, we may also see a near term bottom in euro. The outlook for the Eurozone is grim and the European Union’s denial of reports they are considering a time limited back stop doesn’t help any of the European currencies. However the risk of a short covering is high ahead of Friday’s non-farm payrolls report and investors could use the excuse that manufacturing PMI numbers were revised upwards for the month of September. The manufacturing sector is still very weak but a short squeeze could take EUR/USD to 1.10 without breaking the downtrend.

The Australian dollar was the worst performing currency which is no surprise given the Reserve Bank’s decision to lower interest rates for the third time this year. They took rates to a record low and said they are “prepared to ease monetary policy further if needed.” They expect inflationary pressures to remain subdued for some time and expressed concerns about the outlook for consumption. Indicators suggest that employment growth will slow because as per Governor Lowe, the “progress on jobs and inflation is slower than we’d like.” While we don’t think the RBA will ease again this year, today’s statement was more dovish than the market anticipated. NZD/USD dropped to a 4 year low because the rate cut by the RBA puts pressure on the RBNZ to ease.

USD/CAD sold off despite softer than expected GDP growth and lower oil prices. The move was driven entirely by US dollar weakness. Although the decline stopped short of breaking the 2 week long range, the fact that USD/CAD ended the NY session at its weekly low makes the downside vulnerable to a break. If USD/CAD drops below 1.32, we could see a swift slide to 1.3150.  Last but not least sterling ended the day unchanged against the US dollar. Stronger than expected manufacturing activity helped to prevent fresh losses but the main focus is Brexit. If the EU offers concessions on the Irish backstop, GBP/USD will rip higher but until that happens, big moves in sterling could be limited.