Buck falls further as ISM misses forecasts; USDCAD at 1.33

Summary:

• ISM non-manufacturing PMI: 57.6 vs 59.0 exp

• Worse than forecast but not as bad as last week’s manufacturing equivalent

• USD lower against most of its peers; USDCAD near 1.33

The main economic release of the day has shown a larger than expected slowdown in the US service sector according to the latest industry survey, with the news doing little for the greenback was already trading in the red ahead of the release. The ISM non-manufacturing PMI for December fell to 57.6 from 60.7, below the consensus forecast of 59.0. While this is a disappointing result, the decline is still far less severe than the one seen in the manufacturing equivalent last Thursday and even though it is suggestive of a slowing in activity it is not quite as worrisome as last week’s number. The reading is the lowest in 5 months but still fairly high compared to recent years and comfortably above the 50 mark that denotes expansion/contraction.

There’s been a pretty sharp pullback in the ISM non-manufacturing reading in recent months but the declines aren’t as severe as those seen in the manufacturing equivalent. Source: Bloomberg

Looking at the report in more depth, there are mixed signals on the whole with employment dipping back (56.3 vs 58.4 prior) as well as prices paid (57.6 vs 64.3 prior - lowest since July 2017) but new orders rose to a six month high (62.7 vs 62.5 prior). The US dollar was already trading a little softer on the day before the data hit, and it has fallen a little further since with only the Brazilian Real and Turkish Lira down against the buck. The biggest gainer is NOK, but there is also a notable rise in the EURUSD while the USDCAD has fallen further after recent declines.

The US dollar has softened a little more since the release with only a couple of EM currencies falling further on the day. Source: xStation

Looking around the USD pairs the USDCAD stands out due to the size of the recent declines. As well as the below forecast ISM reading, there was also a beat in Canadian Ivey PMI, which whilst not that significant on its own may aid the Loonie a little. The market has fallen over 300 pips in the last 3 full sessions and today has dipped back near the 1.33 handle as it falls close to its lowest level in a month. Taking fib retracements of the advance from the end of September around 1.2782, we can observe that price is now in the 38.2-41.4% region from 1.3324-1.3296 and this could provide some support in the near term.

Price has fallen a long way in a short time and even though the size of the move may suggest a longer term top is forming, in the near term there could well be a bounce which would offer the possibility of more attractive levels to get short. The main event for this pair this week is the Bank of Canada rate decision on Wednesday with the current expectation for another 25 basis point hike in the overnight rate to 2.0%.

USDCAD has fallen sharply in recent trade but may find some support in the 38.2-41.4% fib region (1.3324-1.3296). The BOC decision on Wednesday is the main event to watch for this market this week. Source: xStation