Despite some encouraging economic news from manufacturing surveys globally equity markets and risk assets in general failed to benefit overnight, with stocks showing a little fatigue following recent gains. The US ISM manufacturing confidence survey beat expectations rising to its highest level since April 2011 while its components looked upbeat, especially the employment component.
This was echoed in the UK and even in the Eurozone the final manufacturing purchasing managers index was slightly higher than forecast. Consequently core bond yields and the USD continued to push higher while gold came under further pressure. The US data also has put the spectre of a December tapering on the table although the November employment report will be scrutinised for further clues.
While JPY bears have been encouraged by the rise in Japanese inflation revealed last week (which was not only energy price led) there’s a long way to go before claiming success in hitting the BoJ’s 2% inflation target. The good news is that the higher real yield differential between the US and Japan is consistent with USD/JPY upside.
The bad news is that more BoJ policy easing is likely to sustain the move and we suspect the central bank will oblige early next year. Indeed, BoJ Governor Kuroda alluded to this yesterday, and his comments were taken at face value by markets, pushing the JPY even lower, with USD/JPY breaching 103 overnight. We keep open our trade idea to buy USD/JPY initiated on 28 October at 97.64 targeting 103.74.
AUD/USD has lost close to 6% since its high around 0.9759 on 23rd October but has found some respite recently from short covering over recent days. The Reserve Bank of Australia however, continues to do its best to weaken the currency. Unsurprisingly left policy rates unchanged today but the accompanying statement noted that the currency remained “uncomfortably high”.
The AUD has been particularly sensitive to a renewed rise in US Treasury yields, being one of the most correlated currencies over recent months and in this respect remains vulnerable to any increase in US yield. Given that we expect US yields to continue to push higher into next year this suggest only a limited AUD recovery over the coming months. In the near term AUD/USD has found some solid technical support around 0.9038.