Global Head of Macro Strategy
Summary: The stronger than expected November US ISM Services survey sparked a sharp US dollar rally just as the greenback was hitting new lows as it failed to confirm the softening inflation and decelerating economy narrative. Hard to tell if the greenback can wring more out of this data points as we face a long wait for the next critical US event risks. The RBA hiked as most expected, but forward guidance was indifferent relative to expectations, while the Bank of Canada is up tomorrow.
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FX Trading focus: The greenback jolted back stronger as November US ISM Services survey fails to support the softening inflation/economy narrative. Still a long wait for next week’s US CPI/FOMC.
The market expected yesterday’s November ISM Services survey to prove that the key US services sector is decelerating, with a reading a point or so below the cycle (since early 2020 pandemic breakout panic) low of 54.4 in October. Instead, we got a far stronger print of 56.5, a still-hot Prices Paid sub-index at 70.0, hardly below October’s 70.7, and an Employment sub-index that edged back into expansion at 51.5 vs. 49.0 expected. It’s a data point that pushes back against the market’s “lean” after the indifferent Powell speech last week, the comfortably quiet October PCE inflation data point and a November jobs report that provided room for two-way interpretation (weak household survey, average hourly earnings only hotter than expected due to small shift in average weekly hours worked denominator as outlined in yesterday’s FX Update.) But while the ISM Services data points is enough to give the market some pause, the key test for the rest of the year remains next Tuesday’s November CPI print and the FOMC meeting the following day. The Wall Street journal’s Nick Timiraos chimed in yesterday with a piece suggesting that the Fed is set to raise the dot plot forecasts for next year at the FOMC meeting: Fed to weigh higher interest rat next year while slowing rises this month. I’ll consider the specifics of the FOMC meeting next Wednesday in coming updates, but it will take more than a 2023 Fed dot plot forecast shift to sustain a significant USD comeback, it will take further incoming data like yesterday’s ISM Services that suggest not only a resilient US economy, but ongoing risks that inflation will prove persistent.
Chart: EURUSD
The EURUSD chart fairly representative of the broader US dollar picture here. The pair spilled higher still, nearly scraping 1.0600 before the strong US ISM Services report yesterday saw the price action pushed back lower on a surge in US treasury yields. . It’s arguably a local reversal, but a more severe reversal would require a more significant wipe-out of the recent rally wave, perhaps 1.0400 or below. As well, we have the difficult wait for the next important incoming US data, the November CPI print next Tuesday, and the FOMC meeting the following day. Still, the recent rally sequence accomplished a nearly 38.2% consolidation of the entire sell-off wave from the 2021 top of 1.2349, falling only a few pips short of the 1.0611 target for that retracement. Hard to see incoming data shifting the outlook here until next week, as we may settle into a range here, one that extends to 1.0223 if the pair closes south of perhaps 1.0400. But today, the USD rally has been oozing out of the US dollar as US yields are also slowly unwinding yesterday’s reaction to data. The US 10-year yield likely remains a very important coincident indicator for EURUSD.
The RBA meeting overnight was short on headline potential and significant market impact. The RBA surprised a minority of observers by hiking rates 25 basis points to take the rate to the odd-ball 3.10% and promised further hikes are to come, as it dovishly noted that “monetary policy operates with a lag and … the full effect of the increase in interest rates is yet to be felt in mortgage payments. Household spending is expected to slow over the period ahead … The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one”. Governor Lowe and company clearly feel the over-riding risk is an oncoming recession and are hoping that weakening demand from the policy tightening already in the pipeline will be enough to do the heavily lifting in bringing down inflation. The market is only forecasting about another 50 basis points of rate tightening from the RBA by Q3 of next year, only a few basis points above what it was pricing before the meeting. While AUDNZD was quite volatile overnight, dipping well below 1.0600 before the RBA hiked and sent weak short hands back above 1.0650 briefly, that pair is back close to unchanged as of this writing near 1.0620. I remain stunned at the scale of NZD strength in the crosses – there will be a brutal reality check there sooner rather than later – favourite cross to look for that is NZDCAD.
NOK took a swan dive after the crude oil sell-off yesterday and after a very weak Regions Survey outlook this morning, with NOKSEK working into interesting levels in the low 1.0400’s and EURNOK is running out of upside range if 10.50+ approaches after trading sub-10.25 as recently as late last week.
Table: FX Board of G10 and CNH trend evolution and strength.
The USD snaps back stronger, but it’s a modest change from the closing levels of recent days. Still noting the extreme CAD weakness (oil again, this time) and NZD strength (still thriving on a dovish RBA via AUDNZD). CNH momentum has official intervention written all over it.
Table: FX Board Trend Scoreboard for individual pairs.
NZDCAD hitting 9.9, a remarkable trend reading, while USDCAD is the long USD pair in an uptrend. Elsewhere, EURNOK is looking back higher, but still within the range, while NOKSEK is similar looking at the bottom of the local range as it also flipped negative yesterday.
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