Daily Morning Report 04.10.2016

The dollar rose against the yen and euro on Tuesday, boosted by an upbeat U.S. manufacturing sector survey, while the pound wallowed near a three-decade low on concerns over a potential “hard Brexit” for Britain.

The greenback was on the front foot after an Institute for Supply Management (ISM) survey showed the U.S. manufacturing sector returned to expansion in September.

The dollar also firmed against the yen because of a reduction in risk aversion, as concerns over Deutsche Bank (DE:DBKGn) have eased for now.

“There might be follow-through buying for the dollar, but it could be difficult for the currency to break out of recent range as the ISM data alone won’t boost the case for the Fed to continuously hike rates,” said Shin Kadota, chief Japan FX strategist at Barclays(LON:BARC) in Tokyo.

Fed funds futures imply that investors still see a very low chance of the Federal Reserve raising interest rates at its next policy meeting in November. The odds slightly favor an increase in December. But before then the currency market will have to navigate the U.S. presidential election.

The dollar index (DXY) rose 0.2% to 95.893.

The U.S. currency was particularly strong against the pound, which has declined steadily since British Prime Minister Theresa May set a March deadline to begin the UK’s formal departure process from the European Union.

The March deadline offers some clarity to the process and underpinned stocks, but many in the market worry that the government’s stance points to a “hard Brexit” where Britain quits the single market in favor of retaining control over migration. [GBP/]

While the post-referendum turmoil spurred demand for safe-havens like the yen, analysts pointed out that the latest slide in the pound is yet to trigger similar reaction.

“Right now the reaction to Prime Minister May setting a departure deadline is mostly limited to the pound. A greater negative impact on the British economy will have be witnessed first for Brexit woes to cause broader risk aversion,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.

The Australian dollar showed little reaction to the Reserve Bank of Australia’s widely-expected policy decision to stand pat on monetary policy.

The RBA kept its cash rate at a record low of 1.5% as Australia’s biggest-ever boom in apartment-building has helped support economic activity.