USD Worries Ahead of Jobs Report & Powell

The US ISM manufacturing report confirmed worries about the impact of the US trade war and raised a fresh set of Fed questions. The yen was the top performer while the US dollar lagged. Nonfarm payrolls are due up next but a speech from Fed chair Powell could steal the show on Friday at 15:15 GMT/London. Currently, Fed funds futures show a greater chance of the Fed cutting interest rates in 2019 than raising them.

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The December ISM manufacturing index fell to 54.1 from 59.3. Economists expected a drop to 57.5 after some weak regional numbers but the fall was worse than the lowest estimate and the largest one-month drop since 2008. In particular, the new orders component cratered to 51.1 from 62.1 and commentary in the report heavily emphasized tariffs.

The drop led to a wave of speculation that the Fed is going to have to do a 180-degree turn and cut rates late this year. The implied odds are now up to 40% and Treasury yields dropped on the same concern.The US dollar sank as its yield advantage erodes and concerns mount about US multinationals after Apple's China warning. The S&P 500 fell 62 points to 2447.

The dollar was particularly hard hit against the commodity currencies late in the day but was sold across the board. In the past four months the market has been scrambling into US dollars on a safety trade but as the economic numbers come in it will be more clear who the winners and losers are. If there's some US-centric weakness, then watch out for a quick reversal in the dollar's gains.

Friday's non-farm payrolls report will be a part of that. The ADP data hinted at a very strong number as it showed 271K new jobs compared to 180K expected. This may simply be part of the secular shift towards seasonal hiring and a sign that some retirees are pulled back into the labor force at this time of year. In any case, the risks may be skewed to downside for the dollar. A strong non-farm payrolls would be brushed off as a lagging indicator while a weak reading would be interpreted as a sign of trouble.

The lasting dollar trade may come on Powell's comments. He's undoubtedly pivoting away from his hawkish stance and it's only a matter of how quickly he wants to do it. On Thursday, Kaplan said he wants to wait through Q2 in a pause, Powell may say something similar.

Also, don't forget the Canadian employment report which is due at the same time as non-farm payrolls. The November print was +94.1K which was the strongest on record. The consensus is for a still-rosy +6K but there's a risk of a major give-back and Thursday's big rally in the loonie could be reversed.