The dollar stabilizes off its lows on a combination of retreating oil prices, slowing manufacturing in the United Kingdom and cautiousness ahead of today’s ISM manufacturing survey. Dampening speculation of an OPEC supply cut next month is weighing on oil prices in light of the latest rally. One possibility suggested by Algeria’s oil minister is to agree to further output cuts at the Dec. 14 meeting but not implement them until February of next year.
All eyes turn to today’s release of the November ISM manufacturing survey expected by consensus forecasts to have edged up to 51.8 from 51.2 in October. But yesterday’s decline in the November Chicago PMI to 49.9 from 53.5, is leading many economists to whisper in new forecasts for a figure at just above 50.0. We had been expecting a sub-50 figure in the November ISM especially since the monthly growth rate of the series stood at -0.8%. The October figure was the lowest since May 2003. Aside from the headline figure, markets will be scrutinizing the new orders index (October fell to 52.1 from 54.2); employment index (rose to 50.8 from 49.4) and the prices paid index (fell to 47 from 61).
The dollar could extend its mini rebound on a relief rally in the event that the Chicago PMI-driven fears of a sub-50 ISM do not materialize in today’s survey and we do get a rise in the headline figure as that would be a vindication for the Fed’s upbeat assessment of the economy. Nonetheless, if the ISM survey does weaken –yet remains above 50- the dollar may be pressured in case of declines in the aforementioned sub-indices. But a rebound in these indices would be most beneficial for the dollar against the yen, Canadian dollar and Aussie.
Also due at 10:00 am are the October construction spending expected to have dropped 0.4% following a 0.3% decline in September.
Cable calmed by data The Chartered Institute of Purchasing and Supply's purchasing managers’ index manufacturing index fell to an eight-month low of 52.6 in November from a downwardly revised 53.5 in October. The weakness was broad, with the employment index falling to 47.6, posting its first sub-50 reading since May. Input and output prices also fell. The disappointing CIPS survey follows yesterday’s decline in retail sales from the Confederation of British Industry index.
Despite these signs of weakness, the haws at the Bank of England continue to have the upper hand due the ongoing emphasis on rising house prices and above target consumer inflation. We do not expect sterling to attain the $2.00 figure any time due to these emerging signs of weakness in the UK’s manufacturing sector and continued cooling in labor markets. Sterling is expected to remain boosted by expectations of at least one more rate hike as well as the sterling-bound M&A flows.
We could see further declines in cable as long as today’s ISM figure remains above 51.0, with preliminary support at $1.9630. Subsequent declines seen stabilizing at 1.9580. Upside gains seen capped at 1.97, while an ISM figure below 50.5, should boost the currency past the 1.9720 and onto 1.9750. Only a figure below 50 carries the potential to stir the pair into 1.9750s.
Euro makes pre-ISM pause
The easing in Eurozone Manufacturing PMI to 58.4 in November from 58.9 is doing little to destabilize the euro rally, especially as the survey showed the highest export orders figure in four months. EU’s monetary commissioner Almunia said forex rates are now at levels that, when seen previously, did not affect the regional economy.
EUR/USD is seen maintaining composure supported as long as we do not see an ISM figure bouncing back above 52. An upside surprise, however, could extend the euro’s pullback towards the 1.3220s and onto 1.3170. A figure below 51 should maintain the intraday bull, especially if we see a drop in the employment index below 50. 1.3300 remains the interim target, followed by 1.3330.
Yen mixed Yen remains adrift around the 116.00 figure following an earlier rally in the Asian session. CPI came in softer than expected at 0.1% m/m, while y/y figure rose 0.1% below expectations of a .2% rise. October household spending fell 2.4% y/y, bettering expectations of a 4.0%. Unemployment fell to record lows of 4.1%.
USD/JPY remains likely to show considerable gains in the event of a positive US data showing, with dollar bulls eyeing the 116.55 target, followed by the 116.80 figure—50% retracement of the 118.24-115.38 move. The 100-day moving average at 117.03 should persist as a considerable cap on the pair. Interim support starts at 115.75, followed by 115.50. Subsequent foundation follows at 115.10.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222 a.laidi@cmcmarkets.com
