The disappointing US Manufacturing ISM yesterday underscored the soft USD environment of late and sent the trade weighted dollar back to the levels of the end-2014/start-2015. While our economists are looking for a solid US April labour market report in Fri (stable unemployment rate, modestly below consensus NFP and, in line with consensus, a modest increase in hourly earnings), this is unlikely to be enough to cause a major change in sentiment towards USD and the market outlook for the Fed funds rate path. Rather, a sustained improvement in the US data is needed to kick of more persistent USD rebound. On Friday, US Treasury published its semi-annual FX report and placed China, Japan, Korea, Taiwan and Germany on a newly created “Monitoring list”. This is based on the mix of criteria of bilateral trade surplus with the US, material current account surplus and an engagement in FX interventions. That said, the Treasury concluded that “no major trading partner of the United States met the standard of manipulating the rate of exchange.”
Price action still sells USD across markets, EUR, GBP, CHF, CAD and JPY are in strong uptrends. Commodity currencies have lost some ground on weaker risk appetite. AUD and NZD both are capped by dovish central banks and rate cuts. Emerging markets have retraced and now sit at upper trend lines of the recent rally trends.The jury remains out on whether this last move in EMFX is a correction or the start of a weakening trend. Asian EMFX remains in strengthening trends but have not gained any ground in the last few days.