Forex Analysis: Yen Drops on Moody's Warning, Dollar May Rise on ISM

2012-11-01 06:05:00 Ilya Spivak, Head Strategist, APAC

The Euro may face selling pressure on swelling ECB rate hike bets as inflation hits a three month low. The Yen is vulnerable if US economic data boosts risk appetite.

Talking Points

Japanese Yen Sinks as Mood’s Warns on Negative Impact of Political Gridlock
US ISM Data May Weigh Boost Dollar on Signs Economic Momentum is Slowing
UK Manufacturing PMI Unlikely to Produce Lasting British Pound Volatility

The Japanese Yen underperformed in overnight trade, down as much as 0.5 percent against its leading counterparts. Forex traders sold the currency after Moody’s said the potential cancellation of bond auctions because of political gridlock over a debt-financing bill is “credit-negative”. The ratings giant added that smooth operation of the bond market is “crucial [because] not only is Japan's gross general government debt the highest of any advanced country, but its gross financing needs are also the most burdensome of any advanced country.”

Looking ahead, the spotlight falls on the US ISM Manufacturing report. Expectations suggest factory-sector activity narrowly slowed in October. Such an outcome may weigh on sentiment, interpreted by traders to indicate ebbing momentum behind US economic growth after a strong showing in September. That stands to weigh against hopes that a firmer US recovery will help offset weakness in Europe and Asia, denting risk appetite and boosting demand for the safe-haven US Dollar vis-à-vis the majors. The ADP Employment Change reading is likewise on tap, with forecasts pointing to a print at 135K in October following a revised 88.2K reading in the prior month.

UK Manufacturing PMI data headlines a relatively quiet set of European economic releases. Economists pencil in a reading at 48.0, showing the industrial sector contracted for the sixth consecutive month. The outcome seems unlikely to yield a lasting response from price action however given its limited implications for BOE monetary policy, where officials appear firmly planted on the sidelines as they assess the impact of the latest round of QE and the new FLS scheme.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
21:30	AUD	AiG Performance of Manufacturing Index	45.2	-	44.1
0:30	AUD	Export Price Index (QoQ) (3Q)	-6.4%	-6.4%	0.9% (R-)
0:30	AUD	Import Price Index (QoQ) (3Q)	-2.4%	-1.2%	2.4%
1:00	CNY	Manufacturing PMI (OCT)	50.2	50.2	49.8
1:45	CNY	HSBC PMI Manufacturing (OCT)	49.5	49.1	47.9
5:00	JPY	Vehicle Sales (YoY) (OCT)	-9.0%	-	-8.1%
5:30	AUD	RBA Commodity Price Index (OCT)	87.3	-	89.3 (R-)
5:30	AUD	RBA Commodity Index SDR (YoY) (OCT)	-16.0%	-	-15.7% (R-)

Euro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
7:00	GBP	Nationwide House prices s.a. (MoM) (OCT)	0.1%	-0.4%	Medium
7:00	GBP	Nationwide House prices n.s.a. (YoY) (OCT)	-1.2%	-1.4%	Medium
8:15	CHF	Retail Sales - Real (YoY) (SEP)	-	5.9%	Low
8:30	CHF	PMI Manufacturing (OCT)	44.7	43.6	Medium
9:30	GBP	PMI Manufacturing (OCT)	48.0	48.4	Medium