Yen and Euro Subdued, Will ISM Slip Below 50?

[B]- Japanese Yen: Wages fall for 4th month in a row

  • Euro: Labor day has many markets closed
  • British Pound: PMI Manufacturing just misses but prices paid remain firm
  • US Dollar: ISM and housing on tap[/B]

Yen and Euro Subdued, Will ISM Slip Below 50?
A very quiet night of trade in currencies as Golden Week continues in Japan while most of Europe is closed for May 1st Labor Day holiday. Data out of Japan once again showed softness in the consumer sector as wages fell for the fourth consecutive month while car sales declined more than -10% on a year over year basis. Constrained by relentless wage declines and ever rising energy costs, Japanese consumers are reluctant to purchase new automobiles putting a serious damper on overall spending growth. The news must be frustrating to yen bulls who have yet to see the country’s corporate recovery, translate into a meaningful uptake of consumption.
Nevertheless, yen’s strength may not lie with Japan’s problematic fundamentals but rather with the market’s new found appreciation for risk aversion. Yesterday’s nasty reversal in the Dow Jones Industrial Average could portend a further wave of profit taking today which in turn could start a rally in the yen as the carry trade which has financed some of the more speculative long equity positions is unwound.
Although, the Shanghai market is closed for labor week holidays, Sunday’s move by the PBOC to increase banking reserves yet again along with official commentary that has warned the general population against rampant speculation in Chinese equity markets, may trigger another round of sell-offs once the players return from their holidays. In short, after reaching stratospheric highs, many of the global equity markets are vulnerable to a correction and so for that matter is the carry trade.
In UK today, the PMI Manufacturing just missed market expectations printing at 53.9 versus 54 forecast, but the prices paid component showed strong gains virtually assuring a 25bp rate hike by the BoE in May. Some analysts have suggested that the central bank could raise rates by 50bp in order to contain the red hot housing market which has been appreciating by double digits on year over year basis. We however, doubt that the MPC will muster enough consensus for such a dramatic move. Despite the fact that UK economy continues to display impressive growth, the US economy is clearly slowing and UK monetary officials, fully cognizant of the global nature of economic growth, are unlikely to implement such drastic policy at this time.
Meanwhile, the question facing US traders today is whether the ISM Manufacturing gauge will remain above the 50 boom/bust level. Last month the reading slipped to 50.9, but market players expect a rebound in April to 51. Given the soft nature of Philly and Empire Fed surveys along with a sharp correction in Chicago PMI data yesterday, a downward surprise is certainly possible. However, when interpreting the ISM report, traders tend to give as much weight to the Prices Paid component as to the headline number. Thus, even ISM disappoints, but prices remain elevated, the greenback may not see much of a sell off. However, a decline in both readings, could spur yet another run at the 1.3700 level in the EURUSD.