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U.S China Trade Talks and Service Sector PMI Numbers to Drive the Markets

The Dollar’s on the back foot early on, as the markets shift attention to trade talks, today’s stats and parliamentary debate on the Brexit deal.

Bob Mason
How to Trade the Trade War?

Earlier in the Day:

After a choppy start to the year, it’s a big week ahead, with focus being on the resumption of trade talks between the U.S and China this morning, Brexit, the government shutdown, central bank policy and a number of key stats that will provide further direction on where the global economy is heading going into the New Year.

Economic data scheduled for release this morning is on the lighter side, with stats limited to November AIG Manufacturing Index numbers out of Australia.

For the Aussie Dollar, the AIG Manufacturing Index fell from 51.3 to 49.5 in December to signal a contraction at the end of the 4th quarter, the first in 26 months. The December number came in at its lowest level since Aug-2016.

  • 6 out of 7 activity indexes fell in December, indicating generally weaker conditions.
  • Food & beverage manufacturers and businesses in smaller manufacturing sectors reported higher production in the run up to Christmas.
  • Large metals, machinery & equipment and chemicals sectors reported a gradual slowing down of demand, continuing a downward trend through the 2nd half of 2018.
  • Across the manufacturing sectors, 5 of the 7 sectors expanded, 2 were stable with the large metals sector in contraction.
  • 3 of the 7 activity indexes contracted in December, 3 were stable, with finished stocks the only activity index in expansion.
  • Input prices rose to a 3-month high, with the average wage index also on the rise, reflecting a continued upward trend in wages.
  • In contrast, factory gate prices fell, weighing on margins at the end of the year.

Looking at the numbers:

  • The employment index fell by 1.5 points to 47.9.
  • New orders rose by 0.3 points to 49.0, well below a 12-month average 57.7.
  • The production sub-index fell by 2.4 points to 49.4, also well below a 12-month average 57.7.
  • The input price sub-index rose by 1.3 points to 76.3, holding above a 12-month average 71.5, while the selling price sub-index fell by 6.3 points to 44.1.
  • Average wages rose by 5.4 points to 64.2.

The Aussie Dollar stood at $0.7124 at the time of writing, a up 0.15 for the morning, supported by the risk on sentiment and FED Chair Powell’s more dovish stance on Friday.

Elsewhere, the Japanese Yen was flat at ¥108.51, with the Kiwi Dollar up just 0.09% to $0.6738, some caution lingering in the FX word at the start of the week, with focus being on the U.S – China trade talks.

The Day Ahead:

For the EUR, economic data scheduled for release through the day ahead includes November factory order and retail sales figures out of Germany, along with retail sales numbers out of the Eurozone, with German factory orders likely to have the greatest impact on the EUR from a data front, forecasts being EUR negative.

Outside of the numbers, trade talks between the U.S and China will also provide direction and is ultimately expected to be the key driver through the week.

At the time of writing, the EUR up 0.16% to $1.1413.

For the Pound, there are no material stats scheduled for release, leaving the Pound firmly in the hands of Parliament and the start of the parliamentary debate over the Brexit deal, British PM Theresa May having delayed the vote from late last year.

At the time of writing, the Pound was up 0.12% to $1.2738.

Across the Pond, economic data scheduled for release includes November factory orders, the market’s preferred ISM non-manufacturing PMI number for December and finalized November capital goods, ship, non-defence, ex-air orders.

While factory and capital goods orders will provide some direction, the non-manufacturing PMI numbers will be the key driver on the data front, the services sector accounting for the lion’s share of the U.S economy, forecasts being Dollar negative.

Outside of the numbers, updates from the resumption of trade talks between the U.S and China and chatter from Capitol Hill will also provide direction, any progress on trade talks likely to overshadow any talk of an extended government shutdown.

At the time of writing, the Dollar Spot Index was down 0.08% to 96.103.

For the Loonie, economic data scheduled for release is limited to December’s Ivey PMI, which will have some influence, though direction through the day will ultimately be hinged on market risk sentiment driven by U.S China trade talks, any negative updates to weigh on crude oil prices and the Loonie at the start of the week.

The Loonie was up 0.04% to C$1.3369 against the U.S Dollar at the time of writing.

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