Yen slips and stocks recover on trade optimism

Summary:

• Japanese yen loses momentum in the final day of trading this week, Asian stocks recover following some comments from a US-China front
• Chinese manufacturing PMI (Caixin/Markit) improved but stayed under 50 points in February
• Mixed macroeconomic readings from the Japan’s economy

Yen lower across the board

The Japanese currency is losing momentum in early European trading on the back of rising trade optimism as well as a mixed bag of macroeconomic releases from the domestic economy. It is slipping 0.3% against the greenback at the time of writing. Improved spirits have been also mirrored in Asian stock markets - the NIKKEI (JAP225) closed 1% higher, the Hang Seng (CHNComp) is rising 0.7% while the Australian S&P/ASX 200 (AUS200) gained 0.4% and hit its five-month high. Let us note that today is the date when the US was to hit the China’s economy with higher tariffs on $200 billion goods if there were no deal until today. However, US President Donald Trump decided to walk away this idea as both sides reportedly narrowed a gap to some extent. As a result, a trade agreement could be signed between Donald Trump and Xi Jinping in mid-March during a summit between the two presidents, people familiar with the matter said on condition of anonymity. Although the two countries seem to be getting closer to a trade deal, the devil is in the details and those arrangements could matter if a possible agreement is able to resolve the ongoing dispute.

The USDJPY is slowly but surely moving to the upside with the level at 114.3 being the major obstacle for bulls. While this move could make sense in the short-term when the pair is more influenced by changing risk sentiment, the yen remains well below its ‘fair value’ implied by our model, therefore we do not think the pair could break 114.3 in a sustainable manner. Source: xStation5

China’s PMI ticks up, mixed data from Japan

Over Asian hours trading we were offered the second China’s PMI release (Caixin/Markit) showing an improvement in February to 49.9 from 48.3. However, the index stayed below the neutral 50-mark for a third month in a row. Delving into the details one may note that total new orders edged back to expansionary territory. On the other hand, new export orders declined last month signalling that foreign demand remains subdued. It also suggests that a broad improvement in total new orders could have been sparked by a rise in domestic orders which, in turn, could be ascribed to the Chinese Lunar New Year (at least to some extent). The similar conclusions we drew yesterday following the official PMI data. Having in mind that the data might be affected by the New Year’s proceeding we reckon that it is reasonable to wait for March in order to assess whether foreign demand is starting to revive. As for now, we stick to the view that the global economy could be offered a slight boost since the second quarter when the US and China are able to terminate the ongoing spat.

In turn, we got also a bunch of data from Japan. Headline inflation in Tokyo jumped to 0.7% YoY from 0.4% YoY and beat the estimate suggesting no change in February. Gauges of core price growth did not move at all - inflation excluding fresh food held at 1.1% YoY while the index taking out food and energy remained at 0.7% YoY. Note that the data from the Japan’s capital could serve as a predictor ahead of an inflation reading at the country’s level. On top of that, the unemployment rate ticked up to 2.5% from 2.4% while the job-to-application ratio stayed at 1.63. Today we also got the data on companies’ performance for the last quarter of 2018. It showed that profitability fell 7% YoY after rising 2.2% YoY in the previous three months, whereas sales rose 3.7% YoY after rising 6% YoY in the previous quarter. Somewhat more encouraging numbers came from a spending front. Namely, capital spending increased 5.7% YoY, up from 4.5% YoY recently (the consensus had also pointed to 4.5%). The increase was even more impressive when we exclude software - a 5.5% YoY rise compared to a 2.5% increase in the third quarter (the consensus had indicated a 3.3% increase). Finally, the final Japan’s manufacturing PMI was revised up to 48.9 from 48.5.

The Hang Seng (CHNComp) has barely moved this week after smashing the resistance at 11200 points. Looking forward, 11800 points could be seen as the major obstacle for bulls. Source: xStation5

In the other news:

• New Zealand’s building permits rose 16.5% MoM in January after rising 5.1% MoM in December; the NZ’s terms of trade fell 3% QoQ in Q4 vs. a 1% QoQ decline expected

• Australian manufacturing PMI increased to 54 from 52.5, the final CBA/Markit index was revised down to 52.9 from 53.1

• Fed’s Jerome Powell repeated that the economy was in a good place