By Kathy Lien
The U.S. dollar snapped higher on Tuesday when Treasury yields surged right before the London close. It is difficult to pinpoint the exact catalyst, as today’s U.S. economic reports were mostly weaker, but the greenback took its cue from rates. Month-end flows may have played a role in the move along with expectations for Friday’s jobs report.
The focus now turns to the U.S. labor market tomorrow, with ADP’s employment report on the calendar. Economists are looking for private payroll growth to nearly double, from 330,000 to 625,000 in the month of August. Whether this foreshadows a strong non-farm payrolls report on Friday remains to be seen because ADP significantly underestimated NFPs last month and the rebound reflects the adjustment. With little direction and catalyst, a good ADP report could get investors excited, but the reaction in currencies, equities and Treasuries should be short lived as the drop in consumer confidence and Chicago PMI signal a slower fall recovery.
Rising COVID-19 cases drove consumer confidence to its lowest level since February, and it may not be long before this cautiousness impacts demand. Chicago also experienced a slowdown in manufacturing activity similar to the New York and Philadelphia regions. Wednesday’s ISM manufacturing report should show that this is a national and not a regional problem. The good news is that house prices rose at a record rate in June, according to S&P CaseShiller.
EUR/USD traders shrugged off the hottest inflation print for the Eurozone and stronger German labor market numbers in a decade. Comments from ECB member Klaas Knot, who said “practically all the incoming news has been a surprise to the upside,” should have also been positive for the euro. However, the market’s appetite for U.S. dollars will often overshadow other reports, which is exactly what we saw today. Sterling, on the other hand, did not have the support of data. With mortgage approvals and lending falling, GBP ended the day down against the euro and the U.S. dollar.
Although the Canadian economy grew at a faster pace in the month of June, the big story for CAD today was the contraction in second quarter growth. Canadian GDP fell 0.3% in Q2, ending a nine-month period of growth. To our readers, this contraction should not be a surprise as we pointed to lockdowns in Q2 as reasons why activity would be constrained. With oil prices dropping nearly 1%, we are looking for further gains in USD/CAD.
Australia releases Q2 GDP numbers tonight. Like Canada, lockdowns could play a significant role in growth. However, unlike the U.S.’s northern neighbor, Q3 could be a dimmer quarter than Q2. New outbreaks were discovered in the second quarter in Victoria, prompting the state to enter a fourth, fifth and now sixth lockdown. Sydney did not go into lockdown until June 25, and remains there today. Economists are still looking for positive growth, but if GDP turns negative, AUD could turn lower quickly.
The Australian and New Zealand dollars were unusually strong, shrugging off weaker Chinese PMIs, a larger than expected decline in AU building permits and a drop in ANZ business confidence. It will be almost impossible for these gains to continue if tonight’s Australian PMI and GDP reports surprise to the downside.