Japan: BOJ’s Tankan shows large manufacturer DI improves less than expected – Nomura

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Japan: BOJ’s Tankan shows large manufacturer DI improves less than expected – Nomura

Takashi Miwa, Research Analyst at Nomura, notes that BOJ’s March Tankan survey shows that improvement in large manufacturer business conditions DI was smaller than market consensus forecast.

Key Quotes

“The BOJ’s March 2017 Tankan showed the current business conditions DI for large manufacturers at +12 and the current business conditions DI for large non-manufacturers at +20, both up two points from the December 2016 survey. The improvement in the DI for large manufacturers was smaller than the median Bloomberg consensus forecast of a four-point improvement, while the improvement in the DI for large non-manufacturers slightly surpassed the consensus forecast of a one-point improvement. It appears that many large manufacturers are still cautious regarding the overall environment for exports, with the average forex assumption for FY17 set at a somewhat conservative USD/JPY 108.43, and we think this may have held back the improvement in the business conditions DI.” 

Results not inconsistent with an export-driven economic recovery

At the same time, business conditions DIs for medium-sized and small manufacturers showed comparatively sharp improvement, up five and four points respectively from the December 2016 survey, and we think these figures may reflect the improvement in exports and production activity more straightforwardly. We thus do not think the results of the Tankan overall are inconsistent with the view that the Japanese economy is headed toward a recovery driven by exports.”

Results suggest economic recovery could promote reacceleration in capex

Capex plans for FY17 (including land purchases, excluding software investment), came in at -1.3% y-y at companies of all sizes. While it is important to take into consideration the sharp downward revision to FY16 plans (-1.4ppt), this figure is slightly higher than the -4.8% reading for FY16 plans as of the March 2016 survey, so we think these can be viewed as relatively strong initial capex plans.” 

“While we think this Tankan shows lingering caution in the business condition assessments of large manufacturers, we see the results as consistent with our view that an export-driven economic recovery should promote a reacceleration in capex heading into FY17.”

GBP/USD better bid, but capped by 1.2500 ahead of UK PMI

The GBP/USD pair is seen on a steady recovery path so far this session, with the bulls now trying hard to regain 1.25 handle amid moderate risk-aversion.

Cable peeks into the green amid subdued treasury yields, in the wake of lack-luster US manufacturing PMI reports released a day before. However, the recovery gains appear capped amid negative equities, as risk-off extends into Asia.

Moreover, the sentiment around the pound remains somewhat undermined, as yesterday’s poor UK manufacturing PMI report continues to weigh. The UK manufacturing PMI for March arrived at 54.2 versus 55.1 expectations and 54.6 last.

Focus now shifts towards the UK construction PMI data due later in the European session for fresh impetus on the spot. Also, the US trade and factory orders data will be closely eyed for next direction on the buck.

GBP/USD Levels to consider            

Valeria Bednarik, Chief Analyst at FXStreet notes, “The 4 hours chart supports additional declines, as the price is currently developing below its 20 SMA, whilst the Momentum indicator is crossing below the 100 level, and the RSI heading south around 46. Still the pair has a major support around 1.2430, which stands for the 38.2% retracement of the January rally. A break below this last should expose March 29th low of 1.2375, en route to 1.2330 a strong static support. The upside should remain capped by selling interest around 1.2540/60 for the bearish trend to remain in place.”