Sustainability of Dollar Rally Hinges on Payrolls
EUR Erases Gains as ECB Cuts Rates and Suggests Doing More
GBP – Could Hit 3 Month High Against EUR
AUD – Major Contraction in Manufacturing Sector
CAD – Trade Surplus Returns
NZD – Oil Prices Jump 3%
JPY Resumes Slide, Japan Closed on Friday
The British pound traded sharply higher against the Euro yesterday but gave up part of its recent gains against the greenback. U.K. data continued to surprise to the upside with manufacturing activity contracting at a slower pace in April. In fact, the index rose from 47.2 to 49.4, just below the 50 boom/bust mark. If you recall, the same improvement was seen in the PMI Manufacturing report released this week. Both manufacturing and construction activity are now almost back to expansionary levels which will be a relief for the Bank of England and good news for the pound. PMI services are due for release today and the sector is expected to remain in expansionary territory. If all 3 PMI reports show improvements in the U.K. economy, the case for a rate cut weakens and with the ECB talking about doing more, the GBP could soar to a fresh 3 month high against the Euro.
The Lloyds business barometer released earlier this week showed an improvement in business confidence in April, this has been reflected in the recent PMI surveys and suggests possible upside risks to today’s release. EUR/GBP traded to the lower end of the range following the ECB statement, but the 0.84 level remains decent support. For GBP/USD, risks of better UK numbers, or worse US numbers will likely see a move towards the 1.56 level but a break with much conviction looks difficult.
Focus turns back to the US today. The weaker ADP employment report released earlier this week and the sharp fall in the employment component in April’s manufacturing ISM has seen market expectations for today’s payrolls decline, the market now expects a rise of 140k to headline payrolls. The unemployment rate will also be a focus; the rate has ticked lower in recent months, but this has been primarily due to a lower estimate of the labour force rather than a rise in employment. While the better weekly claims data suggests a possible improvement in the rate, the detail will be looked closely. Non-manufacturing PMI and factory orders will also be a focus; weak US numbers could put further pressure on the USD.
Disappointing economic data continued to drive the Australian dollar lower against all of the major currencies with the exception of the Euro, which was hit by ECB comments. Following up on Wednesday’s big deterioration in manufacturing activity, building approvals plunged 5.5% in March, import prices stagnated in the first quarter while export prices grew 2.8% compared to a forecast for 4.5% growth. Softer inflationary pressures, weaker housing market activity and a deeper contraction in manufacturing support the case for additional easing from the RBA.
HSBC also revised down its initial Chinese manufacturing PMI estimate from 50.5 to 50.4 – while this was not a major revision, it confirms economic activity in the world’s second economy is slowing, creating more headaches for its trade partners.
The Canadian and New Zealand dollars on the other hand held steady with the CAD trying to extend its gains following stronger trade numbers. Thanks to healthier manufacturing activity, Canada turned a trade surplus in the month of March. Originally, economists were looking for the country’s deficit to narrow from -1.02B to -0.70B but instead Canada reported a surplus of 0.02B. This improvement along with the more than 3% rise in oil prices drove the CAD sharply higher against all of the major currencies except for the U.S. dollar. No major economic reports were released from New Zealand but AUD/NZD dropped to a 2.5 year low today with further losses possible if tonight’s Australian and Chinese service sector data disappoints.