Date: 06 Sep 2018

The importance of Tuesday’s US Institute for Supply Management (ISM) manufacturing business survey data extends beyond the headline-grabbing fact that, at 61.3 in August, the ISM gauge on domestic manufacturing hit its highest level since May 2004. Its importance is also in how it might frame the mindset of US policymakers. It’s precisely this kind of buoyant US economic data that will focus minds at the Federal Reserve, arguably bolstering arguments for continued gradual US rate rises even if the Fed recognizes, at least to some extent, how tighter US monetary policy (and by extension the higher USD) is negatively impacting emerging markets. US Treasury yields hit 3-week highs after the ISM data was released. Of course, Friday’s US jobs and average hourly income data will be the main event for traders this week, from a US economic viewpoint. But what has already been evidenced this week is that, despite emerging market turbulence that might have been expected to lend itself to higher US Treasury prices (and lower yields), US yields have ticked higher. Traders might wish to keep an eye out for how US Treasury yields continue to perform if emerging markets remain nervous. How those yields react to such emerging market skittishness might give a pointer to the USD’s broader direction.

by Neal Kimberley, External Currency Analyst.