Dollar - No Relief Rally as ISM not NFPs tells Real Story

October was a challenging month for the US dollar. The vulnerabilities of the US economy became more apparent, forcing the Federal Reserve to take further action to insure against a deeper slide in growth. The greenback lost value against all of the major currencies and started the month of November under pressure. Today's ISM manufacturing report tells the real story of the US economy. Even though non-farm payrolls beat expectations, triggering a relief rally for the dollar, the move was short lived after investors saw manufacturing activity contract for the third month in a row. While ISM ticked up from the previous month, it missed expectations and remains near a decade low. More importantly, production fell to its lowest level since April 2009 while imports dropped to its weakest level since May 2009. Not only do these numbers validate the central bank's decision to ease earlier this week, but they also confirm that no rates hikes are in sight.

The US non-farm payrolls report was suppose to be the more market moving release but it didn't reveal anything new. Job growth slowed but not as much as economists anticipated (128K vs. 85K), the unemployment rate ticked up to 3.6% from 3.5% while average hourly earnings growth accelerated to 0.2% instead of the 0.3% forecast. These numbers confirm that the economy is slowing but also indicates that the labor market is not the greatest concern. Looking ahead, we expect the dollar to consolidate its losses. There are no major US economic reports next week and with the Fed not expected to ease again this year, big moves are limited. USD/JPY should extend its slide and will most likely break through 107.50.

EUR/USD should also make a run to 1.12 but the rally should be slow. Like the US, market moving reports are limited but the German data that is on the calendar including factory orders, industrial production and trade will most likely reinforce the central bank's concerns about the region's largest economy.  

Instead, the commodity currencies and sterling will be the main focus. The Bank of England and the Reserve Bank of Australia have monetary policy announcements. No changes are expected from either central bank but the BoE could be encouraged that a no deal Brexit is no longer a serious risk. The RBA will remain dovish but like the Fed the likelihood of another cut this year is slim. As such, Australia's retail sales, PSI and trade balance reports could be more market moving than RBA. AUD ends the week strong and is one of our favorite currencies going into the new trading week.

Canadian dollar traders on the other hand will be watching incoming reports to validate the Bank of Canada's more cautious outlook. Fundamentally the Canadian dollar should be trading lower but USD/CAD's rally has been constrained by US dollar weakness. Canada's trade, IVEY PMI and employment reports are scheduled for the release and the majority of these reports are expected to be softer. Labor market numbers are also due from New Zealand and given the rarity of this report, its impact on NZD could be significant. In addition to data, US-China trade headlines could also have a major impact on currency trade next week.