- USD/JPY will most likely continue to trade with an upside bias, especially since the latest US economic data suggests a stabilisation of the manufacturing sector in September
- The yen came under renewed downside pressure as the BOJ’s quarterly Tankan sentiment survey showed that Japanese companies have revised their inflation expectations to the downside. BoJ may step in to try to lift expectations
- The pound may continue to fall below 1.2765 - its lowest level since June 1985 as the UK government finally decides to put the Brexit process on track
In Japan, the yen came under renewed downside pressure as the Bank of Japan’s quarterly Tankan sentiment survey revealed that companies revised their inflation expectations to the downside, with the belief that consumer prices will now only rise 0.6% in the next year compared to 0.7% in the July report. USD/JPY tested 102.39 in Tokyo as a lower reading means that the central bank will have to step in try to lift those expectations. USD/JPY will most likely continue to trade with an upside bias, especially since the latest US economic data suggests that the manufacturing sector stabilised in September.
The ISM manufacturing index rebounded in September after a dip below the 50 threshold in the previous month. The ISM headline printed at 51.5 in September from 49.4 in the previous month on the back of solid improvement in new orders and production. However, employment remained below the neutral threshold, printing at 49.7 versus 48.3 prior. In our opinion it is a bit early to talk about a rebound, especially after the severe slowdown of the manufacturing sector in 2014-2015. Similarly, Markit manufacturing PMI came in slightly above expectations at 51.5 versus 51.4 median forecast. The US dollar rallied strongly in Tokyo with the dollar index surging 0.45% to 96.11.
The pound sterling was also in free fall this morning, breaking the July 6th low. GBP/USD reached 1.2765 in the early European session, its lowest level since June 1985. After months of hemming and hawing, the UK government has finally decided to put the Brexit process on track, setting the timing for triggering Article 50 by the end of the first quarter 2017. Since Monday, market anxiety has skyr as the potential effects of the Brexit still remain unclear.
In the equity market, Asian regional markets were broadly trading in positive territory, while China is closed for the Golden week holiday. The Nikkei was up 0.83% and the broader Topix index rose 0.71%. In Europe, German futures were blinking red despite easing fears over DB. In the UK, futures on the Footsie were up 0.30%, while those on the SMI rose 0.29%.