Cyclicals continue to turn against USD
The USD is trading on the defensive at the start of a pivotal week for the US economic and monetary policy outlook. The very weak Dallas Fed manufacturing index now puts the number of regional Fed surveys in contractionary territory at 4 out 5, reinforcing our expectation of a below-50 reading for the manufacturing ISM tomorrow. Today, we expect the Chicago PMI to slip to 51.0. The ISM print would be of significant psychological significance the markets, especially if followed by a below-trend nonfarm payrolls report on Friday. Rather than supporting the USD via the risk-off channel, we believe the data will be USDnegative for two reasons. First, the FOMC tomorrow should reaffirm current policy stance and considerations of any QE tapering should be pushed back. Second, the market has built up sizeable long USD positions driven by expected outperformance of the US recovery and tapering of QE (see chart). Other measures, like futures positioning (scaled by open interest) on ICE dollar index show that the USD long is at extreme levels that have previously signalled a USD sell-off. We believe there is significant scope for these positions to be unwound as Fed policy continuity supports the search for yield. Our long AUD and CAD positions have been performing well since the start of the week and we expect further gains, targeting 1.0450 on AUDUSD and 0.9935 on USDCAD. A positive reading on Canadian February GDP today should further support the CAD.
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BNP Paribas