The Japanese Yen may rise versus the US Dollar but fall against the other majors on a dovish FOMC outing and a soft ISM Manufacturing report.

Talking Points

Australian Dollar Underperforms on China PMI in Quiet Asian Trade
Yen Outlook Mixed if Dovish FOMC, Soft ISM Data Boosts Risk Appetite

The major currencies consolidated against the US Dollar in overnight trade. The Australian Dollar narrowly underperformed, weighed down by a narrowly disappointing Chinese Manufacturing PMI reading. The report showed factory-sector activity slowed more than economists expected in April, sending the Aussie as much as 0.2 percent lower against its top counterparts.

Price action is likely to remain lackluster in European trading hours as most of the region’s markets remain offline for the Labor Day holiday. Event risk heats up in the US session however as the Federal Reserve delivers its monthly interest rate announcement and April’s ISM Manufacturing gauge crosses the wires.

The rate-setting FOMC is widely expected to keep the monetary policy mix unchanged but traders will look to the tone of the statement for acknowledgement of the recent weakness in US economic data. Such an outcome will reinforce the likelihood of continuity of aggressive stimulus efforts, which stands to feed risk appetite and boost cycle-sensitive currencies like the Australian, Canadian and New Zealand Dollars.

The ISM report stands to amplify this dynamic. Consensus forecasts see manufacturing activity growing at the weakest pace in four months, compounding the recent run of worrying news releases from the world’s top economy and adding credence to the argument for a dovish Fed posture.

The JapaneseYen may yield a mixed response if this helps to produce a risk-on scenario. The unit may advance against the greenback on a narrowing of the yield differential between the two funding currencies while declining against higher yielders as carry trades follow other risky assets upward.

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