Dollar Bulls Keep Kicking, NZD in Focus

The more you look at the fundamentals the more difficult it is to argue against the US dollar. A strong ISM non-manufacturing report added to the case for USD and a round of risk aversion helped. The New Zealand jobs report is the next main event.  

The ISM non-manufacturing index rose to a 41-month high of 58.7 in July, easily beating the 56.3 reading expected. At the same time, factory orders were strong and June durable goods orders were revised to 3.3% from 1.4%.

The data is another piece of evidence that the Fed will tighten rates in the middle of next year. The firmness of the US dollar despite the dovish FOMC statement last week was revealing.

At this point betting on the dollar already feels like a crowded trade but it's tough to make a better case for buying any other currency. Look for US dollar pullbacks to be increasingly shallow, something like the small bounce we saw in AUD/USD this week after an extended decline.

The pound was the top performer Tuesday but it still struggled to sustain gains against USD. The New Zealand dollar was the laggard after a soft milk auction. The kiwi will remain in focus with the Q2 employment report due at 2245 GMT. The consensus is for an improvement in the unemployment rate to 5.8% from 6.0%.

The X-factor in the market right now is the stock market. Twice in trading on Tuesday, the S&P 500 snapped 5+ points lower in moments on no news. Those kinds of moves are rare and illustrate thin liquidity and a lack of conviction. The Dow is now down 1% for the year and a deeper equity correction would have painful repercussions for NZD and AUD.