• Weakened Australian retail sales prompt A$ to fall to 4-year low;
• UK manufacturing grows at slowest pace in 17-months, Sterling under pressure;
• Weakened US manufacturing data prompts US dollar profit taking.
Despite official data which showed Chinese manufacturing held steady in September, the Aussie dollar remained under pressure throughout the morning. The local currency was little changed following AIG’s local manufacturing PMI which showed yet another contraction with manufacturing exports at the lowest level in 18-months. Upon the release of local retail sales data, the Aussie collapsed and remained on the back foot throughout the Asian session. Data showed a 0.1% expansion in retail sales in August, well below consensus of 0.4% causing the Aussie dollar to drop to its lowest level in 4 years, albeit only briefly. Upon the European open, an overbought US dollar appeared to be the theme for the day causing the local currency to approach $0.8750 as the dollar bulls take a rest, at least for the time being.
UK manufacturing data read softer overnight, thus Sterling stepping back into the firing line. Productivity combined with wage growth is fundamental in the Bank of England’s policy decisions as indicated by the deputy governor last week and this wasn’t what the market wanted to see. Although US data will steer FX flows towards the end of the week, there are some noteworthy releases that Sterling traders should keep their eyes on, including construction output this evening with services and composite PMI’s for release tomorrow night. There are an increasing amount of UK policy makers who are of the belief that wage growth is set to surge given such built up pay pressure, the Deputy Governor of the BoE only recently suggested that interest rates will need to rise if productivity can’t match wage inflation and we think this theme may develop in the coming weeks.
Despite Greenback strength against the Euro overnight, demand was not as great against the Japanese Yen with sizeable sellers around 110 as traders sought to take some money off the table following its recent performance against the struggling Japanese currency. A positive ADP employment reading was largely overlooked and USDJPY losses advanced upon the release of a weakened ISM manufacturing number from the US to close the day below 109. Despite a move of over 100 pips, the medium term outlook for USDJPY remains bullish, particularly as we approach the end of US QE at the end of the month and buyers will likely be looking for their levels to buy this dip. Non-farms payrolls are expected to impress tomorrow evening and we expect a marginal uplift in hourly wages from the previous month, both of which could alter Fed inflation forecasts if they come out on top.