US dollar rises to the best levels of the day as ISM report highlights economic upside

I highlighted the opportunity in the beaten-up US manufacturing economy earlier today and a pair of reports today underscored the green shoots in an area that’s been in recession for years.

First, the S&P Global look at US manufacturing was revised in the final report, then the ISM manufacturing survey rose at its fastest pace since 2020 on a jump in new orders.

The FX and bond markets have noticed. US 2-year yields are up 4.1 bps to 3.57% while the US dollar is higher across the board. The euro has slipped through 1.18 after rising above 1.20 last week, and briefly spiking to 1.2080. Now that those stops have been taken out, it’s been a steady decline back to the lowest since Jan 23.

It’s not just the euro as the USD strength is broad based.

In percentage terms, the 1% climb in USD/CHF is the largest move. Last week, the US Treasury once again refrained from naming any currency manipulators in its semi-annual report, and that includes the Swiss franc. When you zoom out, the pair looks like it’s retesting the bottom of the six-month range that gave way last month.

Overall, it’s a big week for the US dollar and manufacturing is a small part. We get non-farm payrolls and Friday and, more importantly, we could get the first comments from Kevin Warsh now that he’s nominated for Fed chair. Every word will be carefully parsed and it’s easy for new Fed chairmen to inadvertently send the wrong message.

In addition, Powell indicated that Fed officials were seeing better things in the US economy. If that’s a widely-shared view, we could soon be seeing a hawkish shift. Right now the market is still pricing in 48 bps in easing this year but a few more reports like the one today and that disappear.

I think we’re headed in that direction and I think the cleanest way to trade that would be in bonds, where I think we will see a 4% print on 2s this year.