US: Key data this week will be an early test for the dollar - MUFG

Part of the driver of US dollar strength has been the evidence of rising consumer and business sentiment in the wake of Trump’s election victory as noted by the Derek Halpenny, European Head of GMR at MUFG.

Key Quotes

“The ISM Manufacturing index will be released today and the index is already up for three consecutive months and given the strength of the dollar and the uncertainty over Trump’s trade policies, the manufacturing sector may well be the first area of the US economy to begin to show the negative implications of recent market moves and Trump’s continued rhetoric that points to him being as aggressive as promised on trade policy. The Export Order component in the ISM report would be the first to reveal any increased concerns over trade uncertainty and the strength of the dollar.”

“The minutes of the FOMC meeting from December will be released tomorrow evening and given the fact that the DOTS plot moved from two rate hikes to three rate hikes this year, the markets will be eager for clarity on why FOMC members upped the overall number of rate hikes. Fed Chair Yellen played down this change as something very minor but the minutes will certainly offer more details on that.”

“Of course the key event of the week comes on Friday with the release of the nonfarm payroll report for December. Beyond the NFP change itself, the two key elements of focus will be the unemployment rate – remember it plunged 0.3ppt to 4.6% last month and we should expect some reversal given such a large drop last month. Secondly, and perhaps more importantly will be the wage data. What was notable at the December FOMC press conference was Yellen’s more upbeat view on wage growth and it is clear to us that the FOMC view on stagnant wages is changing and if that is confirmed in the data, it will certainly raise the prospect of the FOMC being more active in raising rates than the markets currently expect.”

“The annual growth in hourly earnings is expected to jump from 2.5% to 2.8% - if that is confirmed the 2.8% reading would match the October level which was the highest since June 2009 and would certainly help support the dollar at these elevated levels reached on optimistic expectations for growth in 2017.”