Bearish week for the Japanese yen thanks to a lift in global risk sentiment on top of weak economic updates out of Japan.
Japan Headlines and Economic data
- Japan big manufacturers’ morale worsens in Q1 – BOJ tankan
- Japan manufacturing PMI: Output falls at fastest rate in nearly three years in March
- Japan plans tighter oversight of regional banks’ profits
- If you think your last pay increase was bad, spare a thought for workers in Japan
- Japan Feb household spending, real wages cast doubt on consumption
- Japan’s coincident index improves, government maintains economic view
Major Market Drivers for the Japanese Yen
Looking at the one hour chart overlay of inverted JPY pairs this week, we can easily see a bearish lean on the Japanese yen this week. This is likely on a combination of an uptick in positive global risk sentiment, and possibly additional pressure coming from mostly negative economic updates from Japan.
In terms of global risk sentiment, we think the bullish mood stems from better-than-expected reads on leading economic indicators, most notably from the U.S. and China. According to the Caixin manufacturing PMI survey, Chinese factory activity unexpectedly grew in March and the services PMI data hits a 14-month high; U.S. ISM manufacturing rebounded in March as well. It’s also highly probably that the positive progress updates on the U.S.-China trade negotiations this week had traders feeling that the world is slowing stepping away from global trade disaster.
We actually saw yen pairs spike lower on Tuesday on the news of the U.S. and China drawing closer to a deal, and arguably on Monday as well after the positive U.S. ISM survey data. Overall, the yen reacted as it normally does in global risk-on environments, falling as traders sell low-yielders to buy riskier/high-yielding assets.
And unfortunately for yen bulls from Japan, the economic conditions don’t look as bright as leading business indicators from the Tankan and Markit surveys show sluggish demand, lower output, and confidence in general at near record low levels. These reports correlate with the early Monday weakness but didn’t seem to draw a large reaction from the markets.
Later in the week we got the latest updates on household spending and average earnings. Average earnings fell 1.1% when adjusted for inflation, the biggest drop in four years. Again, not big market movers, but it adds more fuel to the Bank of Japan’s overall economic outlook that the recovery could derail. And it adds to the bearish Japanese yen argument that it’s likely monetary policy will stay ultra easy for the foreseeable future.