USD/JPY: Japanese yen spikes as manufacturing PMI makes modest gains

USD/JPY: Japanese yen spikes as manufacturing PMI makes modest gains
  • The USD/JPY declined by about 0.30% as traders reacted to the latest manufacturing PMI data from Japan.
  • The manufacturing PMI rose from the previous 37.8 to 40.1, which is a modest improvement.
  • However, data from BOJ showed that manufacturers sentiment declined to the lowest level in 11 years.

The USD/JPY pair declined by more than 0.30% as traders reacted to the mixed economic data from Japan. The pair is trading at 107.62, which is the lowest it has been since Monday this week.

USD/JPY falls on upbeat manufacturing PMI

Japan manufacturing PMI improves

Japan is predominantly a manufacturing country that is well-known for brands like Toyota, Honda, and Mitsubishi. The sector employs millions of people and is responsible for a significant part of the GDP.

The manufacturing sector made a modest improvement in June, according to the latest PMI data from Markit. The PMI rose from the previous 37.8 to 40.1. Still, since the number is below 50, it implies that the sector is still contracting. This is unlike what is happening in China and Australia, where the PMI is above 50.

In the report, Jibun Bank and Markit said that the sector is facing serious problems such as reduction in new orders, output, and purchasing activity. At the same time, companies that have restarted their operations said that they were operating below capacity.

Order books, employment, and backlogs declined sharply in June. On a positive side, business confidence started to rebound as more companies started to price in the ongoing reopening.

The challenge for Japan is that most of its industries are net exporters. As such, this foreign demand has declined since the world is in its steepest contraction in decades. In a statement, Joe Hayes of Markit said:

“The chance of a V-shape recovery in the manufacturing sector appears slim at this stage, which opens up the possibility of a two-speed economy if the domestic-focused service sector shows more signs of activity.”

Japan’s Tankan manufacturers index disappoint

The USD/JPY pair also reacted to the latest Tankan manufacturing index numbers released by the Bank of Japan. The data showed that the large manufacturers index declined to -34 in the second quarter after falling to -8 in the fourth quarter. The worst-affected industries were motor vehicles, shipbuilding, and iron and steel.

Among the medium-sized enterprises, the index declined to -36, with the worst affected firms being textiles, pulp & paper, iron & steel, and motor vehicles.

Meanwhile, the large non-manufacturing index declined to -17, which was worse than the expected -17. Similarly, the all small industry CAPEX data declined by 16.5% from the previous decline of 11.7%.

The second quarter numbers were expected to be weak considering that the economy was in a lockdown mode for most of the quarter. Indeed, analysts expect that the Japanese economy will decline by more than 22% in the quarter.

USD/JPY technical analysis

USD/JPY technical analysis

The USD/JPY pair declined to an intraday low of 107.60. On the daily chart, the price is along the 50-day and 100-day exponential moving averages. Also, the short and longer-term lines of the MACD have made a bullish crossover. Similarly, the histogram has also moved above the neutral line. This means that even with the current decline, the previous upward trend may continue, with the next target being 108.50.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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