The Japanese yen strengthened against the US dollar on Monday, as well as against most of its other commonly-traded counterparts, as evidence of ongoing contraction in the Chinese manufacturing sector sparked a risk-off sentiment.
By Peter Martin
Monday, May 5, 2014
Markit’s Chinese manufacturing PMI for April came in with a final reading of 48.1, deeper into contractionary territory than the mid-month level of 48.3 and marking the fourth consecutive month that Chinese manufacturing activity has shrunk. That has benefitted the safe-haven yen, pushing USD/JPY down 0.11% to 102.08 by late morning in New York, with the currency pair dropping as low as 101.85 earlier in the session. The yen was also aided by comments made in an interview by Bank of Japan Governor Haruhiko Kuroda, who told CNBC that the central bank remains on target to attain its 2% inflation target by the end of fiscal 2015/2016 and that a recent rise in Japan’s sales tax from 5% to 8% has not had an unexpectedly negative effect on expenditures. ‘The decline after the tax hike had been as we expected or even less than we expected,’ Mr Kuroda said. Mr Hurihiko’s cautiously optimistic view of the Japanese economy provides no added ammunition to those speculating that the Bank of Japan could introduce further stimulus measures.
The euro strengthened modestly against the US dollar, gaining 0.08% to 1.3880. The Governing Council of the European Central Bank (ECB) meets this Thursday in order to decide on monetary policy, a meeting that comes against a backdrop of concerns over low Eurozone inflation. Senior members of the ECB, including President Mario Draghi, have stated in recent weeks that they would take action to address low inflation should it persist, even going so far as to suggest quantitative easing could be used as a tool. The European Commission issued its spring economic projections on Monday, and lowered its growth forecast to 1.7% for GDP in 2015, compared to the previously-forecast 1.8%, while predicting eurozone inflation will run at just 0.8% in 2014 and 1.2% in 2015, also lower than previous projections.
‘Price pressures are expected to remain subdued as we expect energy prices to continue to decline and as demand is only gradually firming and unemployment is still high,’ said Siim Kallas, Vice-President of the European Commission. Safe-haven assets have also been supported by tensions surrounding violence in Ukraine, with the weekend seeing sustained fighting between Ukrainian soldiers and pro-Russian militants in the eastern city of Sloviansk. Russia said on Monday that the intensifying turmoil threatens peace in Europe. Gold rose 0.7% to $1308.5 per troy ounce, while silver gained 0.45% to $19.58 per troy ounce. The downbeat China PMI reading and the worries over Ukraine pushed share prices down sharply in early trading on Wall Street, with the Dow Jones Industrial Average sinking well over 100 points at one point, but by midday the losses had been largely erased, with the S&P 500 pushing into positive territory, helped by an encouraging assessment of the US service sector by the Institute of Supply Management (ISM).
The ISM non-manufacturing index climbed to a reading of 55.2 for April, showing a faster pace of growth than the level of 53.1 seen in March. This was comfortably better than expected, with the important new orders component jumping to 58.2, the highest since last August. Markit’s services PMI was not quite as strong, but still indicated solid growth, with a reading of 55.0, up from the 54.2 at mid-month, but down just a touch from March’s level of 55.3. Though both reports point to encouraging growth, the employment components are a let-down, with the readings for this area barely above the 50 demarcation between growth and contraction. Around midday in New York, the S&P 500 index was up 0.08% or 1.6 points at 1882.7, while the DJIA was down 0.06% at 16,503.
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