Should You Buy the Dollar Dip?

• Should You Buy the Dollar Dip?
• EUR: Minor Lift from Stronger Data
• GBP: No Help from PMI
• USD/CAD Pulls Back as Oil Rises 4%
• NZD: Dairy Prices Fall Another 10%
• AUD: Slips Despite Stronger AU and CN PMI

Should You Buy the Dollar Dip?

Softer U.S. economic reports drove the dollar lower against all of the major currencies today and the decline is leading many investors to wonder if they should buy the dip. The answer to this question depends on the time horizon of your trades. As long term dollar bulls we have bought the dollar on this latest dip and will be looking to buy it again if it falls further. On a short term basis, it may be smarter to wait because technically there's a small head and shoulders pattern forming in USD/JPY and fundamentally, the drop in the ADP employment change and manufacturing ISM reports indicate that the risk is to the downside for Friday's non-farm payrolls report.  A slowdown in job growth is also not unusual after February's strong payrolls number so any dollar positive news would have to come from the unemployment rate or average hourly earnings.  However looking past the labor market report, the message from the Fed leadership remains very clear - June to September is the right time for a rate hike. We have heard this timeframe outlined by Fed Chair Janet Yellen, Vice Chair Stanley Fischer, FOMC voters Dennis Lockhart and Jeffrey Lacker. Every one of these policymakers are optimistic about the outlook for the U.S. economy with Lacker saying today that "unless incoming economic reports diverge substantially from projections, the case for raising rates will remain strong at the June meeting."  Based on the 6bp drop in 10 year Treasury yields, fixed income investors are not convinced that the Fed will be that aggressive but these consistent comments from U.S. officials should not be ignored. As long as payrolls exceed 200k and average hourly earnings continue to grow, a summer rate hike remains on the table. Once U.S. data starts to improve, sentiment will shift, investors will reposition for tightening and the dollar will break out of its consolidation and enjoy a new leg higher.  The closer the Fed is to raising interest rates, the more attractive the dollar will be. Jobless claims, the trade balance and factory orders are scheduled for release on Thursday.  We don't expect any of these reports to help the dollar but at the same time it shouldn't hurt it either as the greenback consolidates ahead of NFPs.

EUR: Minor Lift from Stronger Data

The euro traded slightly higher against the U.S. dollar today after an upward revision to the March manufacturing PMI numbers.  According to Markit Economics, manufacturing activity rose to 52.2 from 51 in February, the strongest reading in 10 months.  The improvements were broad based with better numbers reported from Germany, France and Italy.  Yet ugly Greek headlines continue to cap the currency's rally.  According to German paper Spiegel, Greece has no plans to meet the IMF's April 9th deadline although this was refuted in the late North American session.  Interior Minister Voutzis was quoted as saying that if there is no money flowing in by that date, the IMF will have to understand that they will not be able to make the payment of 360 million Special Drawing Rights (SDR) on time. Countries have missed IMF payments before and at worst, they'll be publicly criticized by IMF Director Lagarde, but the payment is not officially considered overdue until a month has passed.  However when the headline hits, the euro will sell off as investors see this as another challenge in Greece's ongoing debt troubles. We continue to look for the EUR/USD to hit 1.05 but another bounce could be possible before that happens if Friday's U.S. labor market report falls short of expectations. 

GBP: No Help from PMI

Better than expected manufacturing PMI numbers failed to lend support to sterling. According to Markit Economics, the PMI index rose to 54.4 in the month of March from 54.  The increase was right in line with expectations and not good enough to reinvigorate sterling's rally. Investors are still very nervous about the general election in May, which is expected to be one of the closest in decades.  Unfortunately it looks like none of the parties will win an outright majority, which would make it difficult to implement new policies to stimulate the economy. Political uncertainty is never good for a country's currency but once the election passes, economic fundamentals will return to drive the currency and at that time, investors will realize that the economy is not performing all that poorly and that the Bank of England is the next in line to raise rates. In the meantime however, sterling may have a tough time rallying and remain trapped between a 1.46 and 1.50 trading range. 

USD/CAD Pulls Back as Oil Rises 4%

The rebound in oil prices helped the Canadian dollar extend its gains against the greenback. The price of crude jumped 4% today on the back of concerns about a nuclear deal with Iran.  While the White House said that progress was made in today's talks, they also added that the country could face additional sanctions if the deal breaks down. Canadian trade numbers are scheduled for release on Thursday and based on the rise in the IVEY PMI index, an increase is expected which could help compound the recovery in the currency.  The Australian dollar traded lower despite stronger Australian and Chinese manufacturing data and a smaller decline in Australian building approvals.  The sell-off in the New Zealand dollar was well warranted with dairy prices falling another 10% on global supply concerns.  We expect a further pullback in NZD/USD over the next 24 hours.