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Yen May Fall as Markets Cheer PMI Data, Backdrop Still Tense

Yen May Fall as Markets Cheer PMI Data, Backdrop Still Tense

2020-01-24 08:00:00
Ilya Spivak, Sr. Currency Strategist


  • Upbeat roundup of January PMI surveys may boost overall risk appetite
  • Yen down as CAD and NZD tick higher. More of the same may be ahead
  • Tense macro backdrop may undermine follow-through for risk-on moves

A flood of back-to-back PMI surveys from across major economies is likely to be in focus for financial markets in the final hours of the trading week. Japan started things off with an impressive showing, reporting that manufacturing- and service-sector activity growth surged to a four-month high in January.

From here, improvements of various scale are expected in analogous figures from the Eurozone, the UK and the US. That might offer a lift to investors’ mood, offsetting a bit of the recent gloom amid concerns that an outbreak of coronavirus will derail economic momentum.

In fact, a bit of pre-positioning seems to be underway already. The anti-risk Japanese Yen is facing selling pressure while cycle-sensitive alternatives like the Australian and New Zealand Dollars are broadly higher. Meanwhile, European shares have opened strong and S&P 500 futures are inching upward.

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More of the same is likely if the trend toward outperformance on global economic news-flow carries on (blue line on the chart below). That growth is near a three-year low (orange line), where it fell in large part thanks to the US-China trade war, might even perversely hearten in that it delays monetary tightening.

PMI data showing global growth is rising from a 3-year low as economic data flow improves

And yet, follow-through may be tepid. A flurry of comments from bigwigs gathered at the World Economic Forum in Davos, Switzerland this week flagged worries about the dual risk posed by fiscal disfunction and central bank impotence whenever the next downturn invariably arrives.

Against this backdrop, the ECB embarked on a comprehensive review of its mandate even as its President Christine Lagarde re-committed to long-lasting QE and negative rates. That seemed to drive home the point that policymakers are desperately short of ammo were a crisis to develop.

In this sense, the tepid pace of growth is problematic in that it would not take too much stress to bring recession into view. This makes assorted risks like the US presidential election, the lingering threat of a no-deal Brexit, violent escalation in the Middle East, and now the coronavirus, appear relatively scarier.

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Markets are forward-looking. There typically comes a time shortly before a downturn where the supply of immediately positive news has been priced in and scope for upside surprises has been thus diminished. This makes prices asymmetrically more responsive to negative versus positive developments.

Dovish central banks’ efforts to drive down borrowing costs have made owning liquidity – i.e. cash – decidedly cheap in this environment. This might curtail conviction in risk-taking and trigger swift waves of divestment at the slightest sign of trouble.


--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

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