Stronger-than-expected U.S. data helped the greenback shake off its initial weakness at the end Wednesday's New York trading session, much closer to its highs than lows. The dollar didn't manage to turn positive against the euro, sterling and the commodity currencies but it enjoyed some gains versus the Japanese yen and Swiss franc. The dollar should actually be trading much higher given the unexpected strength of the non-manufacturing ISM report. Service-sector activity grew at its fastest pace in 13 years as hurricane Harvey caused a sudden slowdown in supplier delivery times. Most importantly, the employment component of the report increased, which indicates that instead of losing jobs, the services sector – the largest part of the labor market – added jobs at a faster pace in September. According to ADP, corporate payrolls rose by only 135K compared to 228K the previous month but while job growth slowed, investors had braced for an even softer report. So the fact that it was in line is good news for the dollar. These 2 reports will leave investors hoping for stronger job growth. Economists are currently calling for an increase of 80K jobs in September, down from 156K jobs in August. To put this into perspective, after hurricane Katrina, the Bureau of Labor Statistics reported a loss of -35K jobs but it was later revised to an increase of 67K jobs. It is difficult to say how much of an impact the hurricanes had on job growth but a rebound and upward revision is certain for the following month so investors could choose to discount and look beyond September’s soft report. Regardless, with ISM surprising to the upside, we expect the dollar to hold onto its gains ahead of the jobs report.
Despite the U.S. dollar's strength, the euro ended the day higher against the greenback thanks to stronger-than-expected Eurozone PMIs. Manufacturing- and service-sector activity was revised higher for the Eurozone, offsetting the decrease in retail sales. Catalonia announced that it will take steps on Monday to declare independence from Spain despite King Felipe’s rare speech calling the situation extremely serious and accusing pro-independence leaders of having unacceptable disloyalty toward the powers of the state. The Spanish government could still take steps to prevent independence and we think they will but for the time being, investors are looking beyond these dangerous political risks to the next European Central Bank meeting. We still think EUR/USD could still take another hit from the political crisis in Spain but as the monetary policy decision nears, buyers will swoop in quickly. Thursday’s ECB minutes should support the euro as the central bank made it very clear last month that the bulk of policy decisions will be made in October.
Sterling was one of the day’s best-performing currencies. After falling for the past 3 days, we’ve finally seen positive trade courtesy of the UK PMI services report. As we wrote in yesterday’s note, services PMI may not follow manufacturing lower because retail sales and consumer confidence improved last month. Thankfully, that was the case as the uptick in the index to 53.6 from 53.2 helped stem the slide in the currency. It also allowed the composite index to tick up to 54.1 from 54 instead of falling like economists anticipated. Still, according to our colleague Boris Schlossberg,
the underlying data suggested that troubles exist in the largest sector of UK economy. Markit noted that, “Service providers commented on subdued business-to-business sales and delayed decision-making on large projects in response to Brexit related uncertainty. Reflecting this, latest data indicated that overall new business volumes expanded at the slowest pace since August 2016.
All 3 of the commodity currencies appreciated against the greenback with the Australian dollar leading the gains despite stronger U.S. data and weaker Australian prints. According to the latest report, service-sector activity slowed in September with the PMI index dropping to 52.1 from 53. Yet investors found relief in the World Bank’s upgraded GDP forecasts for China. The organization raised its China growth forecast by 0.2% from 6.5% to 6.7% in 2017 as it feels that the “economic outlook for the region remains positive and will benefit from an improved external environment as well as strong domestic demand.” The Australian dollar was in focus Wednesday evening ahead of retail sales and trade balance releases. The recent slowdown in manufacturing activity suggests that trade activity may have slowed and according to PMI services, retail sales contracted for the sixth consecutive month on growing competition from online and offshore sellers. They also felt that spending was being dampened from slow wage growth and rising housing/energy costs. None of this is good news for AUD/USD and could drive the currency pair lower once again. The New Zealand dollar shrugged off Tuesday’s decline in dairy prices to trade higher. New Zealand data was mixed with commodity prices rising but house price and job advertisement growth slowing. NZD/USD is testing the 200-day SMA. While this may be a natural support level, the positive bias in the U.S. dollar could drive the currency pair below this key technical level.
Last but certainly not least, USD/CAD ended the NY trading session below 1.25. This is significant because it marks the 6th consecutive trading day that the pair has struggled around this key level. With each passing day, the risk of a deeper correction grows but at the same time, the longer USD/CAD remains below 1.25, the stronger a breakout will be. Speculators are aggressively short USD/CAD so a short squeeze is still a risk. Looking ahead, Canada is scheduled to release its trade balance Thursday and the drop in the IVEY PMI index suggests that the deficit could widen.