US dollar ends month with a bang

Fresh USD gains on the last trading day of the month after the Chicago Purchasing Managers Index posted a 22-point jump in August to 64.3, registering the biggest rise since July 1983, following a July decline, which was the biggest fall since the infamous October 2008. As volatile as the report appears to be, it does two things:

i)             It is consistent with the rising trend in the services and manufacturing ISMs, as well as the Federal Reserve Bank of NY’s empire survey;
ii)            It suggests a similarly significant improvement in Tuesday’s release of the August manufacturing ISM survey, following July’s 57.1, the highest level since April 2011.

Today’s release of the July consumer spending showed the first decline in six months, which may weigh on revisions for Q3. But the market impact of the report remains offset by better than expected US data throughout the week (Q2 GDP revised to 4.2% from 4.0%, jobless claims remaining below 300K and July pending home sales at more robust 3.3%)

USDX highest monthly rise in 18 months

The fact that the US dollar underperformed this week mainly against the commodity currencies of Canada and Australia reflects lofty risk appetite in capital and equity markets, which emerged partly from decent US data, and partly from expectations of additional ECB rate cuts at the September meetings. If the ECB does go ahead and cuts rates, it would be aimed at further encouraging banks to participate at next month’s TLTRO.

This month, the USD rose against five out of the six components in the USD index basket, with the Canadian dollar being the only exception. CAD’s stellar performance is partly a result of the positive implications of improving US data on its northern neighbour. Instead of interpreting next week’s jobs reports from the US and Canada as a definite test of strength between two outperforming economies, they’re likely to be a win-win for CAD against USD, while USD is seen benefiting against the non-CAD currencies.