USDJPY Relentless; UK PMI Hits 3 Year High

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Market Drivers May 2, 2017
UK PMI hits 3 year high
EZ PMI’s in line
Nikkei 0.70% Dax 0.03%
Oil $49/bbl
Gold $1256/oz.

Europe and Asia:
EUR EZ PMI 56.7 vs. 56.8
GBP UK PMI 57.3 vs. 54.0
EUR Unemployment Rate 9.5% vs. 9.4%

North America:
No data

It was another quiet night in FX and although the European corps were back in full force after being off the May day holiday the action in the major remained muted with EUR/USD and GBP/USD both contained to relatively narrow ranges.

In UK the PMI Manufacturing report came in much better than expected at 57.3 versus 54.0 eyed. This was the best reading in 3 years and surprised the market. “While the major political parties debate how best to leave Europe, British manufacturers have continued to increase their exports to the continent. A weaker pound has kept British products competitive on the world stage and encouraged the twelfth successive rise in manufacturing exports.” said Duncan Brock at CIPS.

Cable popped above the 1.2900 figure briefly, but then quickly retreated off the highs. The pair has been trading heavy for several days as the 1.3000 resistance level appears to have found a considerable amount of offers, but today’s upside surprise certainly bodes better for the UK economy and the pair could make another run at the 1.3000 figure if UK PMI Services beats forecasts later in the week.

Meanwhile, USDJPY was relentless in its upward climb as the pair cleared the 112.00 figure and rose towards 112.25 by morning London dealing. There was no news to explain the move, save for the fact that the pair continues to enjoy risk-on flows in the wake of Macron’s 1st round election win more than a week ago. The drive higher in USDJPY was boosted by EURJPY and AUDJPY flows which continued to press higher.

EURJPY is now fully 600 points off the lows set in pre- French election as all of the investor jitteriness has clearly been wrung out of the pair. It’s difficult to see how much more upside there is in the move given the fact that the market has already priced in a Macron victory. EURJPY may also be trading on positive sentiment vis a vis US policy as traders await tax reform legislation from Congress, but any action on that front will take months to achieve.

In the meantime, USDJPY faces key resistance at the 112.00-112.50 corridor and this week’s US data may be the key catalyst in seeing those levels hold or get taken out. So far USDJPY has completely ignored the recent spate of soft US data, but the FX market would be hard pressed to ignore any materially weaker US labor reports especially because such results would almost surely force the Fed to hold off on any rate hikes in June.

For now, the market remains remarkably sanguine about US economic prospects dismissing the current dip in data as temporary weakness, but unless this week’s reports show a rebound, such optimism may be short lived.

Boris Schlossberg
Managing Director

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