Market Braces for Volatile Session

The Federal Reserve’s cautious tone and Fed Chair Janet Yellen’s dovish comments earlier this week has been the key contributors of the overall US Dollar (USD) weakness recently. As the expected pace of interest rate hikes slowed, USD remained defensive on Friday and recorded its worst quarterly performance in years.

As new quarter gets underway, investors shift their focus to Friday’s major releases, US monthly employment report and ISM manufacturing index for March. In Asian trade, despite upbeat Chinese manufacturing PMIs, risk-off trade, led by dismal data from Japan, helped USD to recover a bit. However, in the European session, slightly better-than-expected German and composite Euro-zone manufacturing PMIs, assisted EUR/USD to post additional gains taking the overall USD index in flat terrain.

Dismal Japanese data

Earlier on Friday, Bank of Japan’s Tankan manufacturing index showed a sharp drop in business confidence in the first quarter. The index, gauging sentiment among large manufacturers, dropped to +6 in March, down from +12 in December. The reading came-in much lower than economists’ expectation of +8 and marks the lowest reading in about three years. The tankan index highlighted that country’s efforts to boost economic growth and fight deflation might be losing momentum, despite further easing by the central bank.

Global PMI releases

Elsewhere, the official manufacturing PMI from world’s second largest economy, China, snapped its losing streak by registering an unexpected expansion in March signalling, although tepid, but positive impact of policies aimed at boosting Chinese economic growth. According to the National Bureau of Statistics, the official Chinese manufacturing PMI for March rose above 50 level, separating expansion from contraction, for the first time in eight months to 50.2 from 49.0 recorded in February. Meanwhile, the private Caixin manufacturing PMI recorded an uptick to 49.7 in March from a reading of 48.0 in February. The official non-manufacturing PMI also inched higher to 53.8 in March from 52.7 in February.

From Euro-zone, the closely watched PMI, compiled by financial data firm Markit, showed a slight pick-up in region’s manufacturing activity. The final Markit Euro-zone Manufacturing PMI rose to 51.6 in March from 51.2 in February. Although the PMI ticked higher, prices for manufactured goods declined at the steepest rate since late-2009 as companies cut prices amid weak demand. The intensification of deflationary pressures in manufacturing sector poses additional challenge for ECB, which continues to face struggle in meeting its goal of bringing region’s consumer-price inflation back to just below 2%.

Meanwhile, as ‘Brexit’ jitters continues to weigh on GBP, UK manufacturing PMI came-in at 51.0 in March, falling short of market expectations of 51.4 and just couple of ticks higher than February’s 34-month low reading of 50.8. According to Markit’s Senior Economist, Rob Dobson, although March reading showed modest improvements, manufacturing sector remains close to the stagnation mark and is unlikely to be a major contributor to the overall economic growth. Weaker-than-expected UK manufacturing PMI dragged GBP/USD back below 1.4300 mark.

Biggest event risk – US NFP

Moving on to today’s center of attraction, US Non-farm payroll report followed by the ISM manufacturing index. The consensus estimates suggest addition of 206k new jobs in March. The unemployment rate is expected to remain steady at an eight-year low rate of 4.9% while the average hourly earnings is expected to rise by 0.2% as against a drop in earning in February.

 

An exceptionally strong number might indicate that the Fed might be moving closer to raise interest rates again and is likely to immediately boost USD. A weaker report, however, would continue to be dollar-negative. Nevertheless, investors should be braced to see increased volatility in the market.