- The US dollar failed to move higher despite a 12-year high in the US September ISM non-manufacturing and a surprisingly resilient ADP employment report. Instead, investors remain focused on who may become the next Fed chairman. There were also rumours that US Secretary of State Rex Tillerson may resign in the summer although this was subsequently denied by Tillerson himself. However, should this materialise, it will potentially undermine the credibility of the Trump administration and be negative for the US dollar.
- On the data front, following the above consensus US September ISM manufacturing on Monday, non-manufacturing ISM also beat expectations, coming in at 59.8 in September - the highest level since August 2005. Citi analysts expect tomorrow’s payrolls report to show that the US created +70k jobs in September, slightly below consensus forecasts of +80k. The change in average hourly earnings remains key for the US inflation outlook. Citi analysts expect average earnings to grow 0.3% month over month or 2.6% year over year, but see more upside than downside risk that may firm up the odds of a Fed hike in December.
- The sterling benefitted from the last night’s strong UK services PMI reading for September although heightened Brexit concerns remain. The next challenge would be in getting negotiations to progress at the 19/20 October EU summit. Citi analysts point out that if the EU moves on to talks about a transition, early political guarantees of a status quo extension could become possible. That could lift some of the near-term uncertainty that is holding back UK business investment, already seen from the recession in the construction sector and an underperforming manufacturing sector. This could in turn lead to the Bank of England raising rates as early as November and probably twice more in 2018.
USD: Unmoved by above consensus US services ISM
- The technical picture for USD remains mixed ahead of tomorrow’s US September jobs report. The USDJPY appears the exception where Japan election concerns appear to be adding to the Yen’s weakness.
EUR & GBP: Further strengthening in euro zone data supporting EUR, sterling looking toppish
- Euro zone PMIs bounced back in September with the services PMI jumping back to 55.8. This sees the Euro zone Composite PMI rising to 56.7, bringing the third quarter composite PMI average to 56.0. This suggests that the growth in third quarter is likely to be in line with second’s quarter growth of2.6%. The upturn in the euro zone economy continues to test capacity, leading to the sharpest increase in backlogs of work since February 2011. Price pressures rose during September, with the rise in input and output prices hitting five-month highs. There may be some upside risks to Citi’s already above-consensus GDP growth forecasts of 2.2% and 2.0% for 2017 and 2018 respectively.
- Citi analysts expect the BoE to hike in 2017 following UK’s above consensus services PMI for September. However investors are already holding significantly long positions in the currency while UK rates markets are pricing in 2 rate hikes over the next 12 months. As a result, the sterling appears vulnerable to any Brexit reversals especially against a more resilient EUR.
Commodity Bloc: AUD range bound, NZD awaits Oct. 7 vote count
- Following the Reserve Bank of Australia decision to leave rates unchanged on Tuesday, the AUDUSD stabilised although Citi analysts expect it to remain largely range bound. The NZDUSD fell to a low of 0.7147 after dairy prices tumbled 2.4% in Wednesday’s milk auction. Sentiment appears soft ahead of the special vote count relating to the NZ elections this weekend. If negotiations between the NZ First Party and the Nationals go well, the NZD could stage a quick recovery as New Zealand’s economic fundamentals remain strong.
Asia EM: The People’s Bank of China cut the Reserve Requirement Ratio
- Over the weekend, the People’s Bank of China (PBoC) announced a 50bp cut to the reserve requirement ratio, reducing the amount of reserves the banks have to hold, in an effort to encourage lending to smaller companies. Citi analysts believe that China’s bond and rate markets will rally modestly after the Golden Week holidays this week. This could pressure RMB slightly as lower Chinese yields drive US dollar demand.
This is an extract from the Daily Currency Update, dated 5th October 2017. Please speak to a Citigold Relationship Manager if you would like a copy.