Chinese PMI data may be the last straw for risk sentiment

Today’s slew of Japanese data may have failed to move the FX market but it provides us with an insight into the struggling Japanese economy. For instance, industrial production data (m/m) came in at -1.2%, well below consensus estimates and prior month’s figure of +1.3% and 1.9%, respectively. Given the general improvement in US economic data and a resurgence in demand for Japanese exports from the US we had expected a higher figure, but we are optimistic production should pickup in coming months as recovery efforts continue and the improving global economic situation eases pressure on Japanese exports through a weakening yen and a pick-up in global demand.

Also out of Japan was CPI data, the unemployment rate, household spending and manufacturing PMI. The unemployment rate unexpectedly dropped to 4.5% from 4.6%, with an increase in the jobs-to-application ratio to 0.75 from 0.73. We think this may only be a temporary drop, however, as more people return to the workforce in coming months pushes the jobless rate higher once again. Consumer prices (y/y) in Tokyo fell broadly in line with consensus estimates – Tokyo CPI -0.1% (prior -0.2%), Tokyo CPI Exc food and energy -1.0% (prior -1.1%) – but national CPI figures pushed higher – national CPI +0.3% (prior +0.1%), national CPI Exc food and energy -0.6% (prior -0.9%) – which brings headline inflation closer to the BOJ’s 1% targeted range.

In Australia, the pool of private sector credit increased more than economists forecasted at +0.4%m/m (exp. +0.3%m/m). The rise can be attributed to the surprise decision by the RBA to leave rates on hold. The overall trend of growth, however, appears to be softening as consumers continue to be wary of debt accumulation, given persistent financial uncertainty and slow growth in labour income. Also out of Sydney, new home sales figures for February rebounded from the -7.3% low in January, printing at +3.0%.

Price action in the FX market was fairly choppy, with the yen continuing its march higher, but not before a brief burst lower mid-way through the session. USD/JPY is finding it tough to sustain a break below 81.80-81.90, but if the flow of soft data continues out of the US then it may only be a matter of time before the pair pushes towards 80.0. On the other, a turnaround in risk sentiment may send the pair back towards 84.00.

It was a mixed session for equities; with the ASX200 trading in the green for most of the session, before closing 0.06% lower, and the Nikkei 225 and Hang Seng are both residing in the red at the time of writing. Commodities generally traded sideways on the back of the mixed results for risk assets. Gold found some significant resistance 1664.04, before testing a support level at around 1659.21. US oil briefly looked like it may hold above 103.50, but the black gold soon retreated toward the mid 103’s.

This weekend’s Chinese PMI may prove to be the straw that breaks the camel’s back, at least in terms of short-term risk sentiment. Given the surprise drop in the unofficial PMI figure earlier in the month, it is not unconceivable that the official figure may print in contraction territory, possibly sending risk sentiment over the precipice.

Source: Forex.com

30.03.2012