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USD/JPY Fundamental Daily Forecast – Weak ADP Data Likely to Fuel Another Plunge

James Hyerczyk

Worries about a slowing U.S. economy and the possibility of further interest rate cuts in the wake of weak U.S. manufacturing data drove investors into the safety of the Japanese Yen on Tuesday. The greenback plunged against the Japanese Yen and from a two-year high against a basket of currencies when data showed U.S. manufacturing activity contracted at the fastest pace in more than a decade in September.

At 07:09 GMT, the USD/JPY is trading 107.727, down 0.023 or -0.03%.

US Manufacturing Survey Shows Worst Reading in 10-Years

According to CNBC, a gauge of U.S. manufacturing showed the lowest reading in more than 10 years in September as exports dived amid the escalated trade war.

The U.S. manufacturing purchasing managers’ index from the Institute for Supply Management came in at 47.8% in September, the lowest since June 2009, marking the second consecutive month of contraction. Any figure below 50% signals a contraction.

The new export orders index was only 41%, the lowest level since March 2009, down from the August reading of 43.3%, ISM data showed.

“Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019. Overall, sentiment this month remains cautious regarding new-term growth,” Timothy Fiore, ISM chair, said in a statement.


Daily Forecast

The weak data was the catalyst, but the price action was primarily fueled by a drop in U.S. Treasury yields and a plunge in demand for risky assets. These two events encouraged investors to park their money in the Japanese Yen.

Today’s move is likely to be fueled by the same two factors. Sentiment may have shifted to the downside on Tuesday with the formation of a technical closing price reversal top. Furthermore, the odds of a rate cut by the Fed at the end of October jumped.

As of Tuesday’s close, the yield on the benchmark 10-year Treasury note fell to 1.55%, the lowest since September 6 and down from last month’s high of 1.80% on September 13.

Additionally, the probability of two more Fed rate cuts before the end of the year jumped from 20% to about 35%, according to data compiled by Bloomberg.

You can pretty much throw out the less-dovish commentary from Fed officials the last two weeks because Tuesday’s data suggests the Fed will have to cut for a third or fourth time this year.

The early price action on Wednesday suggests investors are just waiting for other shoes to drop before officially pricing in a rate cut. The first shoe to drop could be today’s ADP Non-Farm Employment Change report at 12:15 GMT. It is expected to show the private sector of the economy added 140K jobs in September. A lower-than-expected figure could trigger another steep drop in the USD/JPY.

Some traders may be waiting for confirmation from the ISM Non-Manufacturing PMI report on Thursday and still other may want to see what the Non-Farm Payrolls report reveals on Friday.

This article was originally posted on FX Empire