The weakness in the dollar was driven by the disappointing early Markit US Services PMI for May, which came in at 51.2, well below estimates for 53.0. It remains to be seen whether this weakness is held out in the far more important ISM Non-Manufacturing PMI. Although it is worth remembering the Markit Services PMI crashed into contractionary sub-50 territory in February, while the ISM held up at 53.4.
This is likely to only be a temporary pause for the US dollar, as the other US economic data overnight continued to be positive. MBA mortgage applications rose 2.3% month-on-month, after declining the previous month. The FHFA House price index also gained 0.7% MoM, beating market expectations. After yesterday’s impressive new home sales numbers, this adds further credence to the sense that momentum is picking up again in the US housing market.
It will an interesting day for the ASX as it battles with its psychological bête noire – the 5400 level. The ASX has not managed to close above this level since 11 August, and it would be hugely significant for market sentiment if it managed to do so today. BHP’s ADR gained 4.3% overnight, while CBA’s also continued to gain, adding another 0.5%. The ASX is set to open 0.2% higher today around the 5390 level, within spitting distance of 5400.
While the ASX has performed incredibly strongly in April and May, the collapse in the Aussie dollar during that period has helped US dollar earners immensely. Our equal-weighted index of the top 16 US dollar earners is up 14.4% since 12 April, whilst the index as a whole has gained 8%. With the Fed looking increasingly determined to raise rates in June or July, the outperformance of US dollar earners does not look to be over yet.