Market risk sentiment recovered some more as the Chinese official PMIs showed signs of consolidation in September whereas the Japanese Tankan survey deteriorated less than expected in Q3. On the face of it, however, there is not much to cheer about. The Chinese manufacturing output is still contracting and the Japanese business sentiment is at levels consistent with economic stagnation. The gains in risk-correlated currencies like AUD should be attributed to positioning short-squeeze rather than fundamental change in outlook.
The JPY lost some ground as market sentiment improved. We doubt that the recovery in risk appetite will be sustained, however, and are hesitant to extrapolate the recent JPY-losses into the near future. Talk about a new BoJ QE has resurfaced yet again with the Nikkei testing a key support and the Japanese economy poised to contract in Q3. Next week’s BoJ meeting and data could p corroborate but also dampen investors’ QE expectations. In particular, if Kuroda sticks to his message of unchanged policy this should send Japanese stocks lower still but help JPY strengthen. More longer-term we remain bearish the currency given that CA economists have now frontloaded their expectations for QE to October 30 when the BoJ will release its semi-annual report on the economy and prices.
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