DailyFX

Forex: Dollar Climbs as Manufacturing Data Adds to Taper Outlook

John Kicklighter

Talking Points:

  • Dollar Climbs as Manufacturing Data Adds to Taper Outlook

  • British Pound Further Strengthens Grip after Factory Report, FLS Update

  • Australian Dollar: RBA Decision Holds Key to Changing Tack

Dollar Climbs as Manufacturing Data Adds to Taper Outlook

Is the market moving to price in the probability of an earlier Fed Taper? The performance of the dollar and other key markets are offering us a barometer of speculation surrounding this important and inevitable fundamental event. Looking at the greenback’s performance to start the week; notable gains against the euro, yen and a noteworthy recovery versus the sterling sets the scale amongst the various majors that are dealing with monetary policy changes moving forward. The S&P 500’s mild slip (0.3 percent) Monday could be considered a risk-based corroboration of the QE reduction theme, but better measure comes from the performance of Fed’s targeted assets. US 10-year Treasury yields have moved back up to 2.80 percent while the iShares MBS (mortgage-backed securities) ETF dropped to a two-month low on heavy volume. The biggest spark for Taper speculation will be Friday’s NFPs, but positive data like today’s ISM factory report grinds out greater speculation.

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British Pound Further Strengthens Grip after Factory Report, FLS Update

With the exception of the New Zealand dollar, the sterling outpaced all of its major counterparts Monday. A rally for currency matched by a jump in the 10-year Gilt yield two two-month highs suggests yield forecasts had a strong hand in the currency’s performance. On the docket, an early released Hometrack housing prices index presented the fastest pace of inflation in six years; while the November manufacturing activity report unexpectedly soared to its highest level since February 2011 (58.4). That extends the trend of economic improvement and building inflation pressure that has quickly moved the sterling to hawkish extreme of policy speculation. But it doesn’t mean a hike is around the corner…

Australian Dollar: RBA Decision Holds Key to Changing Tack

The Australian docket is stocked this week. We have already absorbed data on trade, manufacturing, inflation and housing health; but the greatest potential lies with today’s RBA rate decision. The Australian dollar is perhaps the most prominent ‘carry currency’ amongst the majors, yet its performance has severely lagged currencies with significantly lower yield as well as other risk-favored asset classes (like equities). This could be a symptom of market concern with China’s future growth prospects (and Australia’s export business with the country) or perhaps fear of local financial stability issues; but the draw of risk-reward cannot be ignored for long. The fastest way to reunite the currency’s performance to traditional risk themes is to see a market wide risk deleverage shake loose moderate long-carry interest in the Aussie dollar. Yet, a more favorable development for the currency would be measurable speculation of an RBA hike through the foreseeable future. A move from the 2.50 percent benchmark at this meeting is highly unlikely. Yet, rhetoric and forecasts can offer far more drive for the currency. Before the meeting, swaps are pricing in 19 bps worth of tightening over the coming 12 months. If that rises, so will the currency.

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