USD/JPY falls as Japan manufacturing PMI remains in contraction zone

Written by: Crispus Nyaga
September 1, 2020
  • The USD/JPY pair declined because of the overall weakness of the US dollar.
  • The yen reacted to better Japan unemployment rate data and manufacturing PMI.
  • The manufacturing PMI was 47.2, which was a slight improvement from the previous month's 46.6.

The USD/JPY pair turned lower as traders reacted to the broader dollar sell-off and the mild manufacturing PMI data from Japan. It is trading at 105.67, which is lower than last week’s high of 106.09.

USD/JPY 3-month chart

Japan manufacturing sector problems remain

Japan is known for its manufacturing sector. Its products, such as Toyota and Honda, have a substantial market share around the world. According to the statistics office, the sector represents about 20.75% of the entire Japan’s Gross Domestic Product (GDP). The sector also employs more than 10 million people directly.

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However, all is not well in Japan’s manufacturing sector. According to Markit and au Jibun bank, the headline manufacturing PMI in the country came in at 47.2 in August. That was higher than July’s reading of 46.6. However, a PMI reading of 50 and below is usually a sign that the industry is contracting. In comparison, the manufacturing PMI in China increased to 53.1 while in Taiwan, it increased to 52.20.

According to the report, companies reported softer declines in production and new business in August. Output declined to the lowest level since February while total orders continued to fall. At the same time, employment in the sector continued to fall while signs of excess capacity remained. In a statement, Annabel Fiddes, an analyst at HIS Markit said:

“It is hoped that as economies around the world reopen and business operations normalise, this will feed through to firmer customer demand and a recovery of Japanese manufacturing activity in the months ahead.”

Meanwhile, other numbers released today were relatively mixed. The jobs to applications ratio declined from the previous 1.11 to 1.08. The unemployment rate rose from the previous 2.8% to 2.9% while capital spending declined by 11.2% in the second quarter.

While the unemployment rate number was worse than the estimated 3.0%, it remains better than that in peer countries. For example, in the United States and Eurozone, the rate is at 10.5% and 7.6%, respectively.

The USD/JPY pair also declined because of the overall weaker dollar. The greenback, which has been under pressure since April, continued to decline. The dollar index has declined by 0.35% because the greenback is lower than all currencies in the index.

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USD/JPY technical outlook

USD/JPY technical chart

The USD/JPY pair is trading at 105.66, which is slightly below the 50-day and 100-day exponential moving averages. The price is slightly above the 38.2% Fibonacci retracement level while the Average True Range (ATR) has been under pressure. The pair is also along an important level as shown using the green circles. Therefore, at this stage, the outlook of the USD/JPY pair is neutral, with the key levels to watch being 106.00 and 105.00.