Written by Boris Schlossberg, Senior Currency Strategist; David Rodriguez, Terri Belkas, John Kicklighter - Currency Analysts
Dollar Tarred By Tariffs But Will NFP Be Its Savior?
It was hardly a banner week for US economic data, as the calendar bled red until Friday. New Home Sales plunged to an 848K annual run rate – well below the 1M necessary to allay fears of a housing recession. Durable Goods also printed lower than forecast bouncing back a paltry 2.5% from the 7...6% contraction the month prior. On the other hand, as the week moved to a close the economy registered a few positive surprises. GDP was revised upward to 2.5% from 2.2% excepted and Chicago PMI skyrocketed to 61.7 from 49...4 forecast. However, the GDP numbers ware backward looking and the market took the Chicago PMI readings with a barrel of salt. Although the headline number was very strong, the internals were decidedly less positive. The employment component actually dropped to 45 from 50.6 and prices paid were lower too, falling to 59.1 from 63.2. New Orders were responsible for the vast majority of the increase jumping to 72 from 48. The news may suggest that the US economy remains far healthier than the bleak scenarios of dollar bears, but a careful look at past Chicago PMI readings shows at least two instances where it flashed a false positive versus the national ISM report.
However, all of the weeks data receded into the background after US announced Friday afternoon that it is imposing tariffs on Chinese products for the first time in 23 years. The actual impact of the tariffs is miniscule, affecting just some paper products, but the market instantly thought “Smoot-Hawley” – the notorious tariff legislation of the 1920’s which many economists believe led to a contraction of world trade and exacerbation of the Great Depression. The dollar was quickly sold briefly touching the 1.3400 level before some profit taking brought it back by the close of trade.
Next week, traders will be able to see rather quickly if the optimistic readings from Chicago will be confirmed by the national data of the ISM Manufacturing. For the time being the national report continues to hover above the 50 boom/bust level, although it did dip twice below 50 in the last 6 months. However, the true driver of currency movements next week is likely to be the US NFP report due next Friday. The market remains optimistic about the US job picture looking for a 120K print versus 97K last month. Indeed, continued job growth has been the principal argument of greenback bulls, who’ve noted that it serves as a powerful antidote to the recent problems of the housing sector. If job growth does keep pace, the bears will have a hard time convincing the market that a US recession is just around the corner but with geo-political tensions swirling about there is no guarantee that even good news will translate into dollar strength.– BS
Dollar Tarred by Tariffs But Will NFP Be Its Savior?