US Dollar looks Bearish on Election Jitters

Last week was busy for the US dollar which saw fresh monthly economic indicators alongside the central bank monetary policy meeting.

Overall, the US economy continued to chug along at a healthy pace into the fourth quarter of the year, with the Federal Reserve bank signaling a potential rate hike in December. Still, despite the broadly upbeat data, the US dollar remained week for most of this week as traders and investors alike tuned into the upcoming US elections due next week, on November 8th.

Recap: US Economy

ISM PMI’s

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US ISM Manufacturing PMI (51.9)

The Institute of Supply Management’s (ISM) Purchase Manager’s Index (PMI) gauge showed the manufacturing PMI rising to 51.9 in October. This headline figure beat market estimates of 51.7, signaling an expansion for the month reported. The major measures of the ISM’s manufacturing activity gauge were mostly higher in October, with the sub-components above the 50-index level.

However, the ISM’s non-manufacturing PMI was weaker, as the index fell to 54.8 in October down from 57.1 in September. The headline figure also missed estimates of 56.0. Most the major measures of activity were lower but were still above the 50-index level indicating continued expansion in the services sector.

US Personal Income rises in September

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US Personal Income m/m 0.3%, September 2016

In September, the US personal income rose 0.3%, which was slightly below the median forecasts of 0.4%. Personal consumption increased 0.5%, with personal income up 3.2% compared to a year ago.

The overall PCE deflator or consumer prices edged 0.2% higher in September, running at 1.2% on a yearly basis. Excluding food and energy, core PCE increased 0.1% on a month over month basis, rising to 1.7% on the year.

FOMC signals a December rate hike

The Federal Reserve met last week and decided to keep the short term interest rate steady at 0.50%. However, the central bank laid the framework for a rate hike in December.

The Fed’s changes to its wording in the FOMC statement saw the central bank giving enough signals that the US economy warranted a rate hike at its next meeting, due on December 13 – 14. There were only two dissenting votes this time, voting for a 25bps rate hike. The Fed noted that “inflation has increased somewhat since earlier this year,” while also highlighting that market-based measures of inflation have moved higher in recent months.

US wages rise strongly in October

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US Nonfarm payroll change: 161k, October 2016

Friday’s payrolls report from the BLS showed that the US economy added 161k jobs in September, which was lower than the market consensus. However, the US unemployment rate slid back to 4.9% after rising to 5.0% while average hourly earnings jumped 0.4%, more than the forecast of 0.3%. On a year over year basis, US average hourly earnings increased 2.8%, which was the strongest jump in wages since 2009. The upbeat jobs report further strengthened the case that the Federal Reserve could hike the fed funds rate in December.

Despite the broadly upbeat economic data, the US dollar continued to remain weak in light of the US elections due on November 8th. The polls put Clinton and Trump in a tight race with the outcome of the election likely to be a cliffhanger.

The US dollar index ICE futures contracts for December delivery closed the week at 96.90, down 1.45% for the week, hitting a two-week low. With technical support seen at 96.00, the Dollar Index could be seen pushing lower this coming week where the election uncertainty overshadows all other economic releases this week.