The dollar had slipped to one-month troughs against the yen and the euro on Wednesday after the Institute for Supply Management’s index showed factory growth slowed to a three-year low in October, but by mid-day Thursday it was higher ahead of the ECB press conference and US data.
The data extended a run of soft U.S. figures this week that suggest to the market the Federal Reserve will keep interest rates steady for some time, though much-anticipated jobs data on Friday is seen as a key gauge of how the economy is shaping up.
ISM Manufacturing dipped to levels consistent with imminent Fed cuts in historical experience, yet the dollar remains range-bound vs. majors. Soft-landing optimism prevails, even after October headline ISM came in at 51.2, below expectations of 53.0, the index’s lowest level since June 2003. Export orders provided solitary comfort in an otherwise bleak release, given the fall in new orders and the rise in inventories.
Ahead of Friday’s payroll report, the private sector ADP payrolls showed 128k jobs added in October (vs. 108k expected). Nevertheless, the ADP report’s accuracy for forecasting surprises has historically been greater on the downside.
Before that, the market will scour comments from European Central Bank President Jean-Claude Trichet after the ECB’s policy meeting today, at which rates are widely seen staying at 3.25 percent. U.S. factory orders for September are due at 1500 GMT.
While Trichet is expected to signal a December rate hike, the market will be looking for any hints as to how policy will develop in 2007. Hawkish rhetoric from Trichet would allow for EUR/USD to push above the 1.2800 level, but over there the euro faces considerable resistance.
USD/CHF rebounded above key support at 1.2400 and is now well placed to edge towards 1.2500-1.2570 heavy resistance area, above which opens the way for a move to 1.2735. A break however below 1.2385 to 1.2360 opens downside potential to 1.1900. This morning’s release of weaker than expected Swiss PMI data had little impact. Swiss October manufacturing PMI slumped to 62.3 from 64.4 hitting the lowest level since February. The data is in line with recent KOF figures, highlighting that Swiss growth is starting to slow down, even if the PMI reading is still indicating expansion for the sector.
Cable has remained extremely well bid and was not affected by comments by Governor King in front of the ‘House of Lords’, which analysts at BNP Paribas viewed as hawkish. King suggested that the economy was unlikely to be able to grow much faster without stoking inflation. On the housing market, King said it was difficult to understand why house prices relative to income were as high as they are and suggested that Eurostat should introduce housing costs into the consumer price index.
In other words, King indicated that the bank is currently targeting the ‘wrong’ CPI. A CPI including housing prices would be higher than the current index. From this view the current monetary policy might be viewed as too lax.
In addition, King suggested that inflation is China might be rising. This is important from an import price point of view. In June the MPC expressed concerns on import prices (at that time driven by energy costs). Now the import price topic might come back on the agenda as China turns from a deflationary to an inflationary source. Cable needs to break 1.9140 to trigger a move on 1.9270, otherwise a break of 1.8990 will send sterling sharply lower.
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