Summary:

• US flash manufacturing and services PMI both top forecasts
• US ten year bond (Tnote) close to potentially major breakout
• Gold and USD could be poised to follow suit

This afternoon’s main economic releases from the US have exceeded consensus forecasts and provided further support to the recent rise in the US dollar. The flash manufacturing PMI for October rose to 54.5 from 53.1 last time, with the reading seeing a strong beat on the consensus forecast of 53.3. Even though this metric isn’t as popular as the ISM equivalent it is fairly well correlated with the more widely viewed number and the strength seen today supports the rise in the ISM. 

The manufacturing PMI from the US has come in strongly for the month of October and supports the rise seen in the more widely viewed ISM number. Source: XTB Macrobond

 It was a similarly positive story for the services equivalent which came in at 55.9 vs 55.2 expected and 55.3 prior. Taken together these data points are undoubtedly positive for the US and they have seen the 10-year treasury bond (TNOTE on xStation) fall to test a potentially key level at 124.70. The Tnote trades inversely to US yields and therefore positive news for the US suggests a greater chance of higher yields and therefore lower prices for the market. The market can be seen as a key driver of both Gold and the US dollar.   

 The Tnote has fallen today to test potentially key support at 124.70. Source: xStation

 The Tnote enjoys a fairly strong positive relationship with Gold and should the former break this key support then the latter could also be set for a larger decline. After both fell together following last year’s US election, there has been a notable divergence between the two markets with Gold far outperforming the Tnote. Gold would have to drop to below the 1200 level to close the divergence if the Tnote stays around current prices.   Should the Tnote break the key support at 124.70 then it could be seen to weigh on Gold and would require a larger drop in Gold to close the divergence. 

 There is a growing divergence between Tnote and Gold with the latter outperforming the former. Source: xStation

There’s also a fairly well recognised relationship between the Tnote and the US dollar. In this case its an inverse relationship meaning that as the Tnote falls the USDIDX rises. If we invert the USDIDX on the right hand axis we can also see a growing divergence here. The USDIDX would have to rise to around 99 to close this divergence assuming the Tnote doesn’t change price. If the Tnote falls further then the USDIDX would need to rise further. 

 The Tnote has previously exhibited an inverse relationship with the USD index. A further drop in the Tnote could be seen to support a rise in the USD index. Source: xStation