Japanese Yen Edges Higher Amid Safety Bid

Daily Analysis - 04/09/2017

North Korea’s Nuclear Test Lifts Demand for Risk Aversion Assets

Safe-haven assets were back in demand during the weekly reopening as investors trimmed their risk exposure after North Korea detonated its most powerful nuclear device tested to-date. The Japanese Yen firmed as much as 0.90% against the US dollar during the Asian trading session.

North Korean Belligerence Increases Risk of Military Conflict

Amid climbing rhetoric, North Korea announced on Sunday that it had successfully tested a hydrogen bomb that was capable of being mounted on a ballistic missile. The test was estimated to have been almost 10 times more powerful than previous explosions and triggered an earthquake of 6.3 magnitude.

US President Trump immediately threatened to tighten economic sanctions and halt trade with any country doing business with the “rogue” regime, while Defense Secretary Jim Mattis warned of a “massive military response.” The nuclear test overshadowed tepid US August employment figures, which showed Nonfarm payrolls growing by 156,000 last month, below the consensus estimate of 180,000. The Yen typically gains when investors try to reduce their risk exposure because the Yen is often used as a funding source to buy higher-yielding assets. In the aftermath of the latest increase in tensions, the USDJPY currency pair has plunged to around 109.500.

UK Factory Activity Defies Expectations

British factory activity accelerated more than expected in August according to a leading survey released on Friday, indicating the economy might be gathering speed after a slow start to the year. The Markit UK Manufacturing Purchasing Managers’ Index rallied to a four-month high of 56.9 from 55.3 in July, easily topping all forecasts.

The survey revealed “broad-based expansion” across all segments, with growth in new orders leading the pack higher. Manufacturing accounts for a below-average 10.00% of the aggregate economy. The British government is hoping the sector will contribute more on the back of a drop in the value of Sterling, which is helping UK exports become more competitive relative to other major exporters. GBPUSD is currently perched above the strong support at 1.2940 after the short-term trend changed to bullish last week.

Australian Wages Rise, Easing Policymaker Concerns

Following a sluggish period for wage growth, Australian companies handed out the biggest raise to employees in two years during the second quarter, though a rundown in inventories could drag on growth. Data from the Australian Bureau of Statistics highlighted a 1.20% increase in salaries or an equivalent AUD 1.60 billion in the three months through June, suggesting businesses are finally willing to share their profits with workers.

Meanwhile, business inventories fell by -0.40% on a quarterly basis, following a downwardly revised 1.10% gain in the first quarter, and well below the consensus market expectation of a 0.40% increase. Official GDP figures will be available on Wednesday, with economists’ forecasting the economy to have experienced 0.80% growth during the period, rebounding from a sluggish 0.30% pace in the quarter ending March. AUDUSD is up in Monday morning trade to currently hover around 0.7950.

Canadian Manufacturing Growth Cools

The rate of growth in the Canadian manufacturing sector slowed in August amidst weaker than expected factory production and new orders. On a seasonally adjusted basis, the Markit Canada Manufacturing PMI dipped to 54.6 last month from 55.5 in July. New orders growth decelerated to the slowest pace registered in eight months, printing at 54.4 in August compared to 56.4 reported a month prior.

Overseas demand also lagged, with new export orders declining to 50.9 from 52.7 in July alongside manufacturing output which slipped to 54.3 in August from 56.3. The Markit report, released Friday, came a day after data showed the Canadian economy witnessed its best pace of economic growth in close to six years during the second quarter. USDCAD has rebounded from session lows, with the pair retaking the 1.2400 level earlier.