USD May Fall on ISM Data, Virus Fears, Inflamed Fed Rate Cut Bets

US DOLLAR OUTLOOK, CORONAVIRUS, US ISM DATA FORECAST – Talking Points

  • US Dollar may fall on weak ISM data and swelling Fed rate cut bets
  • Coronavirus outbreak sapping market mood, inducing easing urgency
  • Risk aversion may be amplified by growing fears about leveraged loans

ASIA-PACIFIC RECAP: CORONAVIRUS FEARS GRIP MARKETS

Asia-Pacific equities were swimming in a sea of red as concern about the spread and economic impact of the coronavirus infected market mood and caused the Shanghai Composite index to open 8 percent lower. A commodity selloff ensued in tandem with iron ore and copper futures tumbling to their daily limits. Chinese Caixin PMI grew to 51.1, higher than the 51 estimate but industrial profits shrank 6.3 percent from 5.4 percent.

Chart Showing Shanghai Composite, Kospi Index, TAIEX Index – Daily Chart

Shanghai Composite index created using TradingView

US ISM DATA MAY FALL, BOOST FED RATE CUT BETS

The US Dollar may fall if ISM manufacturing data for December falls below the expected contraction of 48.5 and further stokes Fed rate cut bets amid market-wide pandemonium from the coronavirus outbreak. Panic from the prospect of a contagion has caused a massive selloff in equity markets across the world, with Taiwan’s TAIEX index suffering a 5 percent loss in a single day last week, the largest since October 2018.

Chart showing US ISM Manufacturing

On a quarter-on-quarter basis, the prior manufacturing print marked the weakest reading since the 2008 financial crisis, though a recent report from the IMF stated that it expects growth to show signs of modest stabilization. However, with the panic about the coronavirus impacting future demand and economic growth, supply chain managers may revise down their outlook.

A softer-than-expected reading could then aggravate what are already-swelling Fed rate cut expectations with markets pricing in almost 50 basis points worth of cuts by the meeting in December. This comes as the Fed – along with several agencies – warned about “elevated” credit risks from leveraged loans and concern about their stability in an economic downturn. Learn more here.

Chart showing Fed overnight index swaps

US DOLLAR OUTLOOK

The US Dollar Index DXY has – until recently – climbed along the January uptrend (red parallel channel) before Friday’s close saw it drop half a percent and erase the latter half of last month’s gains. The index appears now to be staging what could be the beginning of a recovery, though failure to climb higher could see DXY test the January 17 swing-low at 97.09.

US Dollar Index – Daily Chart

Chart showing DXY Index

DXY chart created using TradingView

US DOLLAR TRADING RESOURCES

— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

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