USD: ISM non-manufacturing & ADP surveys offer some support - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has remained at higher levels in the Asian trading session after strengthening modestly yesterday following the release of the latest ISM non-manufacturing and ADP surveys for July.

Key Quotes

“At the margin, the surveys have helped to ease heightened investor concerns over the health of the US economy which has weighed heavily on the US dollar since the release late last week of the disappointing GDP report for Q2. The ISM surveys have revealed that business confidence remained at higher levels in July providing an encouraging signal that economic growth is likely to pick back up towards an annual rate of around 2.0% after expanding by annualized rate of around 1.0% over the last three quarters. The new orders sub-component of the ISM non-manufacturing survey was particularly buoyant rising further to 60.3 in July and moving further above the series average of 56.2 which does not appear consistent with a stagnating economy.           

There was more mixed news on the health of the US labour market. The employment sub-component of the ISM non-manufacturing survey remained at levels consistent with weak employment growth signalling some downside risk to consensus expectations for an increase in employment of around 180k in July.

In contrast, the ADP survey provided a more reassuring signal that employment growth is likely to come in broadly in line with its average monthly run rate in the first half of this year of 172k. However, the recent volatility of employment growth has undermined the accuracy of the ADP survey as an estimate for employment growth adding to uncertainty ahead of the release of non-farm employment report on Friday. In June the ADP survey underestimated private payroll growth by 93k which followed an overestimation of 148k in May.

Overall, we see risks as skewed to the downside for employment growth in July. Our optimistic take would be that economic growth appears to be strengthening but it is likely too soon to be evident in the labour market which is more of a lagging indicator. As a result, the US dollar is likely to remain vulnerable to the downside in the near-term although ongoing monetary easing outside of the US should continue to help dampen downside potential.”