The US Dollar Tops Its Rivals On The Heels Of Strong Data

On Wednesday, the US released encouraging labour data that sent the USD higher against the EUR and the GBP.

Looking forward to more favourable labour data tomorrow, more gains are expected.

The Automatic Data Procession (ADP) non-farm payrolls, the Trade Balance and ISM Non-manufacturing Purchase managers’ indices (PMI) from the US surpassed expectations. This data suggests the US economy is brushing off impacts from earlier financial stress.

For October, the US ADP private employment report showed a gain of 182,000, with small businesses hiring 50% of this increase. Goods producing employment increased by 24,000; this is the strongest since January of this year. Service employment rose to 158,000, although down from the previous month.

According to Maritza Cabezas, Senior Economist, ABN AMRO Bank, these past and expected gains are “consistent with an economy that is growing around trend rates and with more stability in financial markets.”

Consistent with a stronger consumption growth in the previous months, the US service sector picked up in October. The ISM non-manufacturing index increased to 59.1 from 56.9 the previous month.

New orders index rebounded from 56.7 to 62. Employment index increased to 59.2 from 58.3 in September. Overall, the composite ISM for October rose to 55 from 54.5.

The US trade data is not as promising as the labour data because there is no foreseeable trend as an uninspiring global trade environment and a strong US dollar will incur a downward pressure.

Nevertheless, the US’s September trade deficit narrowed to USD 40.8bn from USD 48.3 bn.

This was the lowest level since February. Exports rebounded 1.6% mom in nominal terms and imports dropped 1.8% mom in nominal terms.

The USD is also strengthening as there is an increased expectation of a US interest rate hike.

The US has been dancing around a rate increase for some time now. Currently, there is a high probability this will occur in December.

During a US congressional hearing, Janet Yellen, the Chair of the Board of Governors of the US Federal Reserve, stated that December was a “live possibility”, which only cemented expectations.

However, this is a complex roundabout, as a strong US dollar will lead to tighter financial conditions. And as other central banks continue to ease this will further pressure the USD dollar.

We must also take into account a stronger US dollar has negatively impacted the US’s export growth and manufacturing that is export related.

Therefore, as much as analysts concur there will be a US rate increase in the future the timing remains debatable and unknown.