USD: Sharp drop in ISM non-manufacturing survey triggers short squeeze - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 4, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has weakened sharply following the release yesterday of the much weaker than expected ISM non-manufacturing survey.

    Key Quotes

    “The weaker US dollar has triggered a relief rally in commodity prices and related currencies. The ISM survey revealed that business confidence in the service sector declined by 2.3 point to 53.5 in January reaching its lowest level since February 2014. In contrast the survey averaged 57.2 last year highlighting that business confidence has deteriorated markedly in recent months.

    The survey has heightened concerns that domestic demand is now beginning to soften more materially alongside weak external demand. The US economy appears to have lost further growth momentum early this year extending the slowdown which started in the second half of last year.

    The composite ISM survey is consistent with more modest growth. The employment sub-component declined sharply as well by 4.2 point to 52.1 in January increasing downside risks ahead of the release later this week of the latest non-farm payrolls report. The employment sub-component dropped by a similar amount in January of last year but weakness proved short lived and a misleading signal for employment growth.

    It has prompted the US interest rate market to almost fully remove expectations for any further rate hikes from the Fed in the year ahead. In the current market environment, the market is assuming the worst and hoping for the best. If the market was to become even more pessimistic and start to discount that the Fed’s next policy as likely to be a rate cut to reverse the hike from last year then it would leave the US dollar vulnerable to further weakness in the near-term.

    We maintain a more optimistic outlook or the US economy this year than the market is currently discounting but must acknowledge that downside risks are increasing. If the US economy fails to expand modestly above its potential growth rate this year, our forecasts for further modest US dollar strength are less likely to materialise.

    Comments yesterday from Fed Vice Chair Dudley echoed the more cautious tone from the Fed’s latest policy statement. He stated that the Fed has signalled that it is “acknowledging that things have happened in financial markets and in the flow of economic data that may be in the process of altering the outlook for growth and risk to the outlook for growth going forward…but it’s a little too soon to draw any firm conclusions from what we’ve seen”. However, if financial conditions remain considerably tighter by the time of the March FOMC meeting he signalled that the Fed is less likely to raise rates. Fed Governor Brainard stated as well that “recent developments reinforce the case for watchful waiting”.”
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