Yesterday was a bad day for traders/investors with long dollar positions as the dollar which started off the day on the back foot weakened in the afternoon after disappointing economic data in the United States. The ISM Non-Manufacturing PMI came out weaker than forecast and a clear drop from the prior number. It’s bad enough that US manufacturing has looked wobbly over the past few months, but for services to look less positive has dampened the enthusiasm of even the most hawkish economic forecaster, it certainly suggests that the weakness in the energy and manufacturing sector is now spilling into the service related sectors of the US economy. It’s worth pointing out that the ADP employment change data came out better than expected, but I suppose that watchers were in glass half empty mode and the relationship between the ADP data and the more comprehensive labour market report on Friday has always been patchy. It’s been a rather indifferent few weeks for the dollar against most developed market currencies and it’s not difficult to understand why. What with January being such a tough month for equity markets and growing doubts about the state of the global economy, the big question for those who believe in the bullish dollar trend has been, will the Federal Reserve pull back from its plan to normalise interest rates? The more indifferent US data we see the harder it becomes to justify the bullish case. And now here we are, a few days away from a non-farm payroll report which could easily turn out as a negative surprise. No one wants to standing for the dollar when the music stops, and so we got yesterday. Clearly a liquidation of sorts, whether it was just a case of position reduction or outright capitulation for some is hard to tell. My guess is that it was more about position reduction, either way the effect is the same.
The pound has been the one weakling which up until the last few days has not fared particularly well against the dollar, but a combination of stronger than expected services data in the UK and some uncertainty about quite what Governor Carney will say after today’s MPC decision has encouraged those who have maintained short cable (GBP/USD) positions to decide that discretion is the better part of valour. I certainly agree that the risk today with Carney’s speech is that he may not sound quite as pessimistic about the UK economy as he has been in the past.
To me all of this stuff is trading noise. It all boils down to one thing for me, the US seems to be the only major economy which isn’t actively trying to weaken their currency. We all know what the Chinese are doing, the Japanese just took rates negative joining the Europeans, and the Brits have made it clear that rates aren’t likely to go up this year. So we can have periods like this which I would characterise as position cleansing, but when all is said and done, are you going to hold on to currencies that are trying to weaken or the one that doesn’t seem to care? I know what I want to do!
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