The USD remains in one of the most interesting of positions – the upside breakout is in my view just beginning and this week’s non-farm payrolls is likely to give it another kick. Why? ‘all roads’ lead to a. full hawk Fed – is it going to steepens its hike trajectory for the Federal funds rates? It would appear likely.
Looking to the quarter ahead the macro outlook appears robust as global growth should remain intact but the risks are building as a possible global credit squeeze grows and geo-political challenges remain ever present.
There will be see signs of that risk in the interim? Being a new month the normal monthly macro-events are back on the schedule and therefore forward indictors are due.
I really believe the forward looking PMIs are going to spark some price action. The market is looking for any signs of weakness and the PMI indices are likely to be the first to indicate economic weakness may be on its way.
The US, Japan, Europe, the UK, China and Australia are all releasing their respective PMI data this week. The EUR is the one to watch here as overall EU economy has been floundering of late.
Looking domestically; Australia’s PMIs have been rather robust manufacturing has been astounding however considering manufacturing now only contributes approximately 12% of overall output its effects on the AUD are rather mute, services on the other hand dominates Australia’s output and should be recognised as an impactor.
The previous month’s read of 59 is strongest read of the past 10 years. Forecasts for Wednesday’s read are for it to easing to 56 which is still very solid by all measures. The momentum in economic output remains strong and should hold for the interim.
Chart1 : Australia Performance Services Index
(source: trading economics)
Retail sales and the trade balance are also due on Wednesday. These two pieces of data are perfect example of the differences between business and the consumer in the domestic economy.
Retail sales have remained sluggish and even though it has bounced off the October 2017 low the overall trend over the past 4 years is down; family finances and personal consumption remains strained and should be a drag on the AUD considering consumption makes up ~60% of Australia’s total GDP.
Trade on the other hand is having a renaissance, net exports in the first quarter were the strongest figures in several years and added over 0.6% in QoQ GDP growth it has also registered a net positive read 14 out of the previous 16 months. June saw oil spiking of output issues considering the price correlation with natural gas one would expect a positive trade balance read on Wednesday which may counter the retail sales reactions. Be aware these figures are released together.
The RBA meets on Tuesday and although it welded to a neutral stance and will not be moving rates any time soon there have been some dovish tones of late the most notable was the minutes omitting this line:
‘In the current circumstances, members agreed that it was more likely that the next move in the cash rate would be up, rather than down.’
Will this be removed from the Statement on Tuesday? It would be a dovish signal to the market and a negative sign for the AUD as the possible rates differentials with the US 10 year mount.
Which brings me back to why the USD is likely to continue its match higher – the non-farm payrolls on Friday are likely to show US employment remaining in ‘full employment’.
Unemployment is at its lowest level since the late 1960’s, at 3.8% the average hour earning are expanding at 2.7% the highest in the post-GFC era and employment change is still averaging 200,000 per month.
If this strength continues the Fed will be forced to tighten faster as wage growth and employment will positively impact inflation. The US 10 year remains below 3% on geo-political reasons but the weight of pressure from the Fed raising harder and faster will push yields 3% and higher still. This will attract funds over the medium term as USD positive.
The DXY looks like it has a structural support going forward and the 100 mark is not out of the question in the next few months.