USD/JPY Fundamental Daily Forecast – Stronger After Better China PMI Data Boosts Treasury Yields, Appetite for Risk

The Dollar/Yen is trading higher on Monday, boosted by a jump in U.S. Treasury yields and strong appetite for higher risk assets. Treasury yields are rising and global equity markets are soaring following data released over the week-end that showed economic activity in China unexpectedly rebounded in March. The news dampened concerns over a slowing global economy.

At 02:21 GMT, the USD/JPY is trading 111.092, up 0.241 or +0.22%.

China Manufacturing PMI Surprises

Over the weekend, China reported its services industry saw faster growth in March than estimated, while manufacturing activity also recovered.

The official non-manufacturing purchasing managers’ index (PMI), which covers the services and construction sectors, rose 0.5 points from February to 54.8, to remain well above the 50-point mark that separates growth from contraction.

This is important because the services sector accounts for more than half of China’s economy and has helped soften the impact of a manufacturing downturn. Growth slowed late last year, but never contracted, however, amid a cooling property market and faltering consumer demand for everything from cars to mobile phones.

The major event that has global investors excited is the news that China’s official manufacturing PMI picked up in March after posting three months of declines. The report showed a rise of 1.3 points to 50.5, pulling the survey out of a contraction. Furthermore, the monthly gain was the greatest since February 2012 and came after Beijing announced it would introduce tax cuts to help struggling manufacturers.

Additionally, the composite PMI, which covers both manufacturing and services, rose to 54 points in March, from 52.4 a month earlier.

Japan’s Tankan Survey

In Japan, the closely watched “tankan” survey by the Bank of Japan showed worsening business confidence among the country’s big manufacturers in the first quarter.

“The large manufacturing weakness is probably worrying for (the Bank of Japan)… in the sense that the economy isn’t picking up as quickly as perhaps as had been anticipated but the bigger issue…is not the economy,” Mitul Kotecha, senior emerging markets strategist at TD Securities, told CNBC’s “Squawk Box” on Monday.

Low inflation remains the major issue for the BOJ. “Inflation keeps moving away from that target, or at least not…near the target and I think this is the biggest issue for the Bank of Japan,” Kotecha said. “They can’t change policy until that happens.”

Daily Forecast

The early news is bullish for the USD/JPY, but gains could be limited later in the session if the U.S. economic data comes in softer than expected. Of course, stronger than expected data could spike the Dollar/Yen to the upside.

U.S reports include retail sales, ISM Manufacturing PMI, Business Inventories, and Construction Spending.

The major reports are Core Retail Sales and Retail Sales. Look for a 0.4% and 0.3% increase respectively. ISM Manufacturing PMI was reported at 54.2 last month. Traders would like to see the uptrend continue.