The US dollar consolidation continues, and on Monday, the currency fell against many of the majors. As we’ve seen happen consistently over the past few days, just 30 minutes of price action – be it a sharp drop or rally – has determined where the greenback has ended the day relative to the rest of the majors. Indeed, it looks like low volume trading may persist through the rest of the week and until the US Labor Day holiday passes. That said, the DXY index has still managed to hold above a trendline drawn from the July 2008 lows, and this help to identify the US dollar trend in coming days.
Looking to the day’s economic news, US manufacturing reports continue to reflect sharp improvements in the auto sector, which has been helped along by the US government’s “cash for clunkers” program. First, the Chicago Purchasing Managers Index (PMI) jumped to a reading of 50 in August, the highest since September 2008. Now, 50 is the point of neutrality for the index, so the rise indicates that there was no change in business activity, but ultimately this is better than the steady contraction we’ve seen for the past ten months. Likewise, Milwaukee PMI jumped to 56 in August, the highest since January 2008, from 45 while the Dallas Fed index rose to -9.1 percent, the highest since November 2007, from -23.4 percent. That said, the “cash for clunkers” program formally ended on August 24, so it will be important to see if the rebound in the manufacturing sector can continue without the government stimulus.
On Tuesday, the ISM manufacturing index is projected to rise above 50 – the point of neutrality – for the first time since January 2008, which would add to evidence that the sector is experiencing a recovery in business activity on the back of the government’s “cash for clunkers” program. Based on Monday’s price action, the US dollar is still not responding to basic fundamental reports, as the currency generally fell lower on surprisingly strong US data. Nevertheless, traders should watch for increased volatility upon the release of the data.