Factories Could Fluster Fed

The worst reading on the Empire Fed in six years puts the focus on US manufacturing and the effect of the strong dollar. The kiwi was the top performer Monday while the pound lagged. The RBA meeting minutes are up next.

A plunge in new orders dropped the Empire Fed to -14.9 compared to +4.5 expected. The huge miss initially weighed on the dollar but it's far too soon to say that the strong dollar is crippling manufacturing. Another explanation is that bloated Q2 inventories are being run off. In any case, the market will now sharpen the focus on factories starting with the Philly Fed on Thursday. Out of the 5 existing trades in the Premium Insights, one AUD-related pair is open ahead of tonight's RBA minutes.

Click To Enlarge

Despite the soft reading, the dollar showed some impressive resilience on Monday, in particular against the euro. EUR/USD jumped a quarter-cent to a session high of 1.1125 after the data but slowly sank to 1.1058 later. The decline came amidst better risk appetite in a sign that the euro is the favoured funding currency.

The Canadian dollar was also under pressure early but rebounded along with a bounce in oil prices. Cable was soft throughout the day ahead of Tuesday's critical UK CPI reading.

First, the focus is on Australia. AUD/USD has settled into a 0.7250 to 0.7450 range in the past three weeks. It may be attempting to bottom but that will depend on what the RBA does next. We'll get a clue at 0130 GMT when the RBA releases the minutes of the latest meeting. Stevens is seen on hold for a period but the minutes could fire a fresh salvo of jawboning towards AUD.

Another Aussie factor to monitor is a report in the state-run China Securities Journal saying the PBOC may lower the RRR because of tight lending conditions. The danger in a rate cut so soon after a devaluation is that it may be seen as a sign of desperation because of a floundering economy. In that case, AUD could decline while safe assets like gold and Treasuries may get a boost.