A Win for Soft Data?

As we head closer to US jobless claims today and the Jackson Hole speeches tomorrow, let's recognize the recent decent US data. Yesterday's release of the US Markit service sector index rose to its best level since April 2015 in a sign the US economy could finally be turning a corner. The 9% decline in US new home sales was partly due inventories. NZD was the biggest loser over the last 24 hours. The Premium long in EURNZD was closed at 1.6350 for a 240-pip gain as the pair hit a 14-month high.

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The main US dollar trade remains politics. As soon as it looked like Candidate Trump was fading away, he reappeared at a rally Tuesday night and threaten to shut down the government if his border wall wasn't funded. That was the main driver in markets and led to a round of USD selling that erased the USD/JPY gains from the day before.

We see no end to the drama in US politics but some stability in the White House is just one way the dollar could recover. Another is a pickup in growth. The Markit services PMI hit an 18-month high at 56.9 compared to 55.0 expected and 54.7 previously. We have long lamented the divergence in hard and soft economic data in the past year. The post-election bump in surveys just hasn't translated into genuine improvement.

But the Markit number is an outlier. It hardly climbed after the election then slid early in the year. More recently gained steadily before surging in the August data. There is no reason to believe Markit's data is superior but they were able to avoid the election trap. Maybe it's a sign that pent up demand, credit and a softer currency are helping. In addition, the 'prices charged' component rose to the highest since Sept 2014.

The big move outside of the dollar was in the kiwi as it slumped on soft pre-election growth forecasts. NZD/JPY broke down in a potentially-ominous sign for risk assets. EUR/NZD and NZDCAD were also notable movers.

Fed chair Yellen's speech in Jackson Hole tomorrow is at 10 am ET (3 pm London) is likely to focus on regulation, she could well mention the latest economic conditions. The same goes for Draghi, who is due to speak 5 hours later.