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JPY: ISM non-manufacturing survey is an important event risk - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 3, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Lee Hardman, Currency Analyst at MUFG, suggests that the yen has continued to weaken modestly in the Asian trading session as it gradually reverses safe haven gains from earlier this year.

    Key Quotes

    “The reversal of yen strength has been relatively modest so far and is lagging the recent rebound in global equity markets. Yen weakness would likely accelerate in the near-term if USD/JPY broke above key resistance at around the 115.00 level where the high from the 16th February is located at 114.87. US yields have started to display more upward momentum as well over the last week increasing upside risks for USD/JPY.

    The recent improvement in global investor risk sentiment has been supported by an easing of more acute global growth concerns while investor expectations for the pace of further Fed tightening have remained very gradual which has created a goldilocks trading environment for high beta commodity and emerging market currencies in the near-term. With the market not yet fully discounting one further rate hike this year from the Fed, we doubt how long this goldilocks environment can be sustained.

    The latest economic data releases from the US have provided reassurance that the US economy is not slowing as sharply as feared by some in the near-term. The release yesterday of the latest ADP survey signalled that US employment has likely remained solid estimating that a stronger than expected 214k private sector jobs were added in February. We have our doubts about the ADP survey’s effectiveness as a leading indicator of non-farm payrolls but it is consistent with other labour market indicators which signal continued improvement.

    We had expected weaker payrolls growth in Q1 as payback for the surge in employment growth in Q4 when the economy added on average 279k jobs/month. It still leaves us cautious over risk of a weaker payrolls print on Friday. If employment growth beats our more downbeat expectations it would suggest that the underlying trend for employment growth is even more solid than we had expected. The tightening labour market is resulting in clearer evidence of a pick-up in wage growth and rising underlying inflation pressures.

    The developments support a further gradual tightening of Fed policy beyond which is discounted in the US interest rate market if the US economy continues to expand above potential. The release today of the ISM non-manufacturing survey will be important in this regard. If the ISM non-manufacturing survey repeats the sharp decline evident in the services PMI in February it will re-heighten concerns over a sharper US economic slowdown weighing on the US dollar. However, if the non-manufacturing survey repeats the improvement in the ISM manufacturing in February it will further ease concerns over a sharper US economic slowdown providing support for a stronger US dollar.

    A further easing of US financial conditions if the US equity market continues to rebound could set the stage for the Fed to resume rate hikes earlier than currently anticipated by the US interest ate market especially given clear evidence that actual inflation is picking up as desired by the Fed.”
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