Friday, January 3, 2020

ISM Manufacturing PMI for December is likely to stay below 50; FOMC meeting minutes to focus on repo market issues

Tags
  • Dollar
  • Federal Reserve
  • FOMC minutes
  • DXY
  • ISM PMI

01032020_ta

Analysts’ Pick: ISM Manufacturing PMI for December is likely to stay below 50; FOMC meeting minutes to focus on repo market issues

The dollar is likely to continue to fall in the short-to-medium term thanks to easing US-China trade tensions. US President Donald Trump sent out a tweet on the last day of 2019 saying that the US and China will be signing the US-China phase one trade agreement on January 15th. The announcement is likely to boost investor optimism and as a result put downward pressure on the greenback. Other drivers for the dollar will be this week’s ISM manufacturing PMI and the FOMC’s meeting minutes.

Major currencies dominated the dollar in 2019 aside from the euro

01032020a_ta

November's PMI report hints that December's manufacturing sector will likely continue to be in contraction. New Orders and Employment in the sector continued to contract at a higher pace and statements from the survey's respondents signal that customers are still cautious on the US-China trade war.

November’s new orders and employment contracted at a faster pace in the sector

01032020b_ta

*Source: Institute for Supply Management

A cheaper dollar and easing US-China tensions should help exports in the sector, although this effect will likely be balanced out by the holiday season and as businesses pull back on investments to wait until January for the US-China phase one agreement.

The greenback weakened throughout December, dipping below the one-year average price

01032020c_ta

*Source: Bloomberg

The FOMC’s meeting minutes will likely highlight Fed officials' discussion on the repo market's liquidity issues. As the dot plot for December showed Fed officials mostly unified on the outlook of interest rate in 2020, Fed officials likely spent more time deliberating on the liquidity issues in the repo market instead. The meeting minutes will likely show that the Fed will continue to inject liquidity into the repo market as a short-term solution while considering other options such as a standing repo facility (which will allow certain banks to convert treasuries into reserves on demand at a specified rate) or a revision banks’ reserve requirements.

The greenback will likely continue to face pressure this week thanks to expected dovish comments from the Fed on repo market operations and diminishing demand for the dollar as a hedge against trade risk. In addition, ISM manufacturing PMI is likely to come in close to expectations, i.e. below 50. DXY is likely to fall as a result, possibly past 96.44 to range between 96.00 and 96.44, a downside potential of roughly 0.33% to 0.79%. But risks of today’s German inflation and employment data for December missing forecasts could potentially put upside pressure on the Dollar Index.

  Scenario Effect on DXY
1 ISM manufacturing PMI meets expectations; dovish comments from the Fed on repo market operations. alls past 96.44 to range between 96.00 and 96.44
2 ISM manufacturing PMI falls below expectations; dovish comments from the Fed on repo market operations Falls towards 96.00 ranging between 95.40 and 96.00
3 ISM manufacturing PMI meets expectations; no real solutions from Fed on repo markets operations Rise slightly, to range between 97.00 and 97.38

*Source: ADSS

Technical Analysis:         

DXY

A reversal in the trend for the greenback started in December, with the bears taking over control from the bulls. With RSI indicating that DXY prices has started to normalise, the dollar has room to fluctuate in the short-term. In the medium-term, the Dollar Index will likely continue to face downward pressure and bears are unlikely to lose momentum thanks to easing US-China tensions. The bears are likely to continue to test support levels as a result, as the bulls struggle to keep the dollar afloat. We expect the Dollar Index to break the 96.44 support to range between 96.00 and 96.44 if the PMI report and the meeting minutes skew the outlook for the dollar towards the downside.

Support: 96.44 / 96.00 / 95.40

Resistance: 97.38 / 97.80 / 98.40

DXY Chart (H4)

01032020d_ta

*Source: ADSS, TradingView