The US dollar tanked yesterday as the lSM Manufacturing reading for November came in below expectations. The index printed 48.1 last month, marking a contraction form the prior month’s 48.3 reading. Notably, the reading was also below the expected 49.4 reading. This is the fifth month of weakness in the US factory sector and the fourth consecutive month of below-neutral readings.
New Exports Down
The drop in last month’s manufacturing reading has been mainly attributed to weakness in new exports and a decline in inventories. With manufacturing having been in contractionary territory for the last four months, the outlook for the US economy is looking fairly subdued.
Fed Easing Still Possible
At its recent meeting, the Fed noted that it would hold off on further rate cuts while it waited to assess the impact of its recent cuts and the path of incoming data. With key readings like this remaining in negative territory, there is still a case for further easing from the Fed. The Fed itself noted that should any further weakness materialize in the US economy, then it could be forced to ease further. While the Fed is not expected to ease at the upcoming December meeting, pricing for a further rate cut in the early part of next year is starting to rise again.
Trade Talks In Focus
The key driver here is the US/China trade talks. While there has been plenty of talks recently regarding the likelihood of a deal coming before the end of the year, uncertainty is starting to creep back in and recent reports have cast doubt on the prospect of a deal. China reportedly suspended a US warship visit to Hong Kong this week. This was in retaliation to the US approving a bill in support of the rights of pro-democracy protestors in Hong Kong. The protests have been a difficult issue for Trump. He has been warned by China not to interfere. However, with Trump having now approved the bill, the stand-off between himself and Xi is once again threatening to disrupt trade talks.
As recently as last week, Trump had told reporters that a deal was very close and that the two sides were in the “final throes” of negotiations. However, in light of this latest development, there is a very real fear that talks will falter. This fear has been reflected in the broad reversal seen across equities markets this week.
US Employment Reports Next
Looking ahead this week, traders will be focusing on the US employment reports due on Friday. Should we see any weakness in labor market data, this would likely add further bearish pressure to the US dollar. Ahead of that, we also get the US ISM Non-Manufacturing reading on Wednesday. Given that this reflects a much larger portion of the US economy, this reading could be a key source of volatility. Again, any downside surprise will likely see USD sharply sold.
The reversal in the USD index this week has seen price moving sharply back under the 98.24 level. The index is now fast approaching support at the 97.69 level. The rising trend line from last year’s lows comes in just below. While above here, we could see a further rotation higher. However, if the price breaks back below here, focus will turn to the 97 level next.