Dollar shows contempt for skeptics after PMI data raises returns

– New highs for US PMIs take USD to weekend.
– The USD index comes out of its low, helped by the EUR / USD.
– The euro drops after the ECB said it was monitoring ZE yields.

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On Friday, the dollar was expected to end the week in defiance of its skeptics as exchange rates rose alongside U.S. government bond yields following a flurry of economic surprises and late declines in European currencies.

Dollars were bought and most other currencies sold before the weekend, leading to intraday gains for the greenback on all but the Canadian dollar and a handful of emerging market currencies, including the South African rand.

The gains widened and strengthened after IHS Markit said its purchasing managers index for the U.S. services sector fell from a revised upward 64.7 in April to a record high of 70.1 in May as more of the economy has reopened, causing activity and production in the sector to soar.

Meanwhile, the equivalent survey of the U.S. manufacturing sector also rose to a new high of 61.5 in May from 60.5 the previous month, both of which carry weight given that the world’s largest economy is probably stepped up a gear this quarter.

“The latest flash PMIs reinforce our view that the economy will continue to grow at a faster rate in the United States than in the Eurozone over the next several years. This feeds into our forecast that long-term yields will rise faster. in the first country than in the second and that the euro will fall against the US dollar, ”said Simona Gambarini to Capital economics.

USD performance

Above: The price and performance of the US dollar exchange rate over different time periods. Source: Netdania Markets.

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A stronger U.S. recovery is ultimately a boon for economies elsewhere as well as their currencies, although on Friday and the day after the release, U.S. government bond yields have risen and appear to be prompting another flash-in-the-pan. bid for the dollar.

“The housing boom story just won’t die, even as sales peaked in October last year and mortgage applications to finance home purchases have plummeted 19% between January and April. Sales follow mortgage applications in the usual way, ”says Ian Shepherdson, chief economist at Macroeconomics of the Pantheon.

The bond market and US dollar suitors on Friday overlooked other data from the National Association of Real Estate Agents whose sales fell from 6.01 million units in March to 5.85 million in April, reflecting an attempt to reverse the earlier strength in the housing market.

Pantheon’s Shepherdson said US home sales are expected to fall further to around 5.2 million in the coming months, citing data on mortgage applications that positively correlate with the overall sales trend, but which constitute a leading indicator of the latter.

USD chart

Above: the US dollar index displayed at 15-minute intervals alongside the 10-year bond yield.

“We continue to expect the USD to remain weak as US yields remain contained and note that if the DXY holds near the end of February low of the day, a close here for the index on the week would be the lowest for the DXY since early 2018, ”said Shaun Osborne, chief currency strategist at Scotiabank.

The dollar was stronger on a broad basis ahead of the weekend, but also against the single European currency in particular, with a decline of -0.29% playing a leading role in lifting the ICE Dollar index from which was near its lowest level for over three years.

Europe’s single currency, which represents 57% of the ICE Dollar index, had weakened for some time before the release of US data. European Central Bank (ECB) President Christine Lagarde spoke at a press conference following a Eurogroup meeting.

“The President of the ECB, Lagarde, has come to shake things up a bit. She took an accommodating tone, claiming to have spotted the latest increases in yield and that the ECB is watching them closely, ”said Mathias Van der Jeugt, head of research at KBC in Brussels.


Above: the US dollar index displayed at daily intervals alongside the Euro-dollar rate.

In addition to noting recent increases in European bond yields, Lagarde said it was still too early to consider “medium to long term issues” in what was a possible reference to recent speculation in some parts suggesting that the BCE may soon be willing to start reducing its coronavirus. -an inspired quantitative easing program.

The ECB’s Emergency Pandemic Purchase Program buys European government bonds weekly to keep pressure on yields and maintain favorable funding conditions for governments, with a total allocation of 1.85 trillion euros.

The ECB is still buying € 20 billion per month as part of its initial QE program, which has no full allocation or implied end date, although analysts say the € 1.85 trillion would expire around April or May 2022 if the bank maintains the recent rhythm of weekly purchases. .

“His comments caused German yields to descend impulsively, with the bullish curve flattening 2-2.4bp in the middle and long end. US long rates lose around 1bp, EUR / USD fell below 1.22 to 1.219, ”KBC’s Van der Jeugt said on Friday.

This is a reduction in purchases under this latest PEPP program at a reduced weekly rate that parts of the analyst community say could be announced in June.

Such a reduction would prolong the ECB’s extraordinary support for euro area economies and its increased presence in the bond market, but at the same time would be seen by the market as an expression of confidence in the euro area economy, which this week took interim measures. lockdown ”in many games.

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