After NFP ISM amp why JPY Far from Oversold

The ISM survey was the day’s game-changer (not jobs report) after showing a stronger than expected reading, giving a sharp boost to global equities and even lifted EUR/USD by more than a full cent to 1.3711.

January manufacturing ISM hit a nine-month high at 53.1, posting the biggest monthly gain since March 2011, with its employment component hitting a seven-month high and posting its biggest point-change since March 2012. Readers of this column were warned yesterday about the upside surprise in ISM.

The NFP’s robust 157K release and the prior upward revisions jobs were not enough to appease markets due to the increase in the unemployment rate back to 7.9% following two straight months of 7.8%. The rise in the jobless rate briefly weighed on risk appetite (dragging ES futures, weighing on yields and capping EUR vs USD) until the ISM changed the order flow.

The charts show US business surveys leading the way via their stance in both services and manufacturing, yet this also means that global business surveys face more upside room for recovery and the potential for further momentum to the “global recovery” story, which augurs negatively for the USD & especially the JPY.

Further negativity in the Japanese yen is implied by the fact that futures market positioning currently holds a 64,000 contracts net short JPY vs USD (JPY shorts exceed JPY longs by 64K). This is well below the 188,000 net shorts in JPY back in June 2007. With JPY shorts more than 100% below their record high, this implies the path for 97.00 suggests to be the path of least resistance. Considering our cyclical bullishness in EUR/USD, this implies a preliminary target of 132 yen for EUR/JPY, followed by 139.80.

For a historical perspective on the evolution of JPY futures flows, see our Dec 10 article here.