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The U.S. dollar index (DXY), a weighted index of the value of the U.S. dollar relative to a basket of six major currencies, continued to inch up, 0.54% on Tuesday to close at 99.45, despite weak U.S. economic readings on Monday from the Institute for Supply Management (ISM), showing that its index of national factory activity for December fell to 48.2, the lowest level since June 2009, missing the expectations of 49.0 from a Reuters poll of 80 economists. Any reading below 50 signals a contraction in business activity. The U.S. Commerce Department also said on Monday that construction spending slipped 0.4%, the first and biggest drop since June 2014, missing economists’ forecast of a 0.6% rise.
Weak construction spending and ISM figures prompted the Federal Reserve Bank of Atlanta to lower their U.S. GDP growth forecast in the fourth-quarter of 2015 to 0.7% on Monday, down from 1.3% forecasted on December 23. Deutsche Bank turned sour on the U.S. economy, as the bank sent out a note on Tuesday saying that the U.S. GDP in the fourth-quarter of 2015 will grow only 0.5%, instead of the 1% previously forecasted. Economists at Deutsche Bank also trimmed their 2016 first-quarter GDP forecast by a half-point, to 1.5%, citing recent disappointing data on trade, construction spending and manufacturing activity.
The industrial Midwest may be hardest hit by the economic slump, as the Chicago purchasing manager index (PMI) last Thursday unexpectedly plunged to 42.9 in December, its lowest reading since July 2009. The reading was down from 48.7 in November and much worse than the 50.0 expected by economists.
The European Union’s statistics office said on Tuesday that euro-area consumer prices rose just 0.2% on an annualized basis in December, missing a median estimate of a 0.3% increase, according to a Bloomberg survey of economists. Core inflation, excluding items with volatile prices such as fuel, remained at 0.9%. Weak euro-area inflation may put pressure on the European Central Bank (ECB) to step up its stimulus program at the monetary policy meeting of the Governing Council on January 21, in Frankfurt.
Dollar bulls, including Citigroup and BNP Paribas SA, are betting on the divergence in central bank policies, as the U.S. Federal Reserve expects the fed funds rate to rise to 1.375% by the end of 2016, meaning at least four more quarter-point rate hikes in 2016.
The People’s Bank of China (PBoC) lowered the daily reference again, to 6.5169 yuan to the dollar on Tuesday, the weakest since May 2011, according to the PBoC’s China Foreign Exchange Trade System. The offshore yuan (CNH) traded in Hong Kong is now at a five-year low of 6.6734. The spread between the onshore (CNY) and offshore yuan spot surged as high as 15 basis points, which might trigger more capital outflows, meaning sell or short the yuan denominated assets and rotate into dollar assets, or safe-haven currencies such as the Japanese yen.
Technically, the DXY has been moving in a narrow trading band, between 93.5 and 100, as the market seems not to be able to decide whether the dollar should move higher or lower. The index just broke out the symmetrical triangle (SYM TRI) chart pattern within the trading band and is gaining upward momentum toward the 100 level, despite the weak U.S. and global economic data.
The headline risks for the dollar this week are the Fed minutes from the December 15-16 Federal Open Market Committee (FOMC) meeting, due to be released on Wednesday, and the December U.S. non-farm payrolls report by the Labor Department scheduled for Friday. The MarketWatch survey of economists is expecting job growth of 204,000 in December. |
