USD/JPY Continues to Slide Lower As ISM Services Point Toward US Recession

Posted Thursday, April 6, 2023 by
Skerdian Meta • 3 min read

JPY benefiting as a safe haven asset

After making a bullish reversal and coming from below 128 in January, USD/JPY climbed around 10 cents until early March. But it has resumed the downtrend again as the USD and reached a new low following the release of softer ISM non-manufacturing report. It hit the upper area of a support zone which stretches between 130.345 and 130.60. However, short-term buyers pushed it above 131 again where we decided to open a sell USD/JPY signal.

The market is closely watching the resistance level at 131.00, as staying below this level will keep sellers in control in the short term. However, there are more upside targets that would need to be broken. On Tuesday, USD/JPY fell below the 200-hour moving average and entered a higher swing area between 131.55 and 131.84. The Asian session’s high today peaked at 131.837, remaining within the swing area and below the 200-hour moving average.

During the US trading session yesterday, there was a surge in downward momentum as the ADP employment confirmed the decline in this sector after the softer JOLTS job openings on Tuesday, while the ISM services also approached contraction. Although, technical support levels held during the initial test. Sellers continue to dominate, but they must break through the swing area to pave the way for a decline towards March’s extreme low of 129.633. If the swing low at 130.345 is broken, additional support is anticipated at the natural level of support at 130.00.

ISM ISM Non-Manufacturing Report for March

ISM March services index 51.2 points vs 54.5 expected
Prior was 55.1 points

Employment index 51.3 points versus 54.0 prior
New orders index 52.2 points versus 62.6 expected
Prices paid index 59.5 points versus 65.6 prior
New export orders 43.7 points versus 61.7 last month
Imports 43.6 points versus 52.6 last month
Backlog of orders 48.5 points versus 52.8 last month
Inventories 52.8 points versus 50.6 last month
Supplier deliveries 45.8 points versus 47.6 last month
Inventory sentiment 57.9 points versus 55.3 last month

That drop in new orders is a sharp one and overall this looks like a survey that’s recoiling from a bank crisis. Now the question is: Does it recover quickly from the banking rout? Or is there a lasting change in market/consumer psychology? We won’t know until next month but at least the lower inflation number will give the Fed some comfort.

Note that we also saw a drop in this survey in January, only for it to quickly rebound. That’s unusual for this survey, which is usually a great forward-looking barometer.

Comments in the report:

“Restaurant sales remain favorable compared to pre-pandemic trends. Traffic is recovering and nearly flat. We are optimistic about the coming months and have invested in building remodeling and equipment, as well as a new back office and POS (point of sale) system.” [Accommodation & Food Services]
“Sales continue to increase even as interest rates moderately increase. Most suppliers feel their supply chains are back to normal, with inventories climbing and delivery times improving. (We) fear this will have a detrimental effect in a six- to 12-month time frame.” [Construction]
“Still experiencing shortages in general labor positions amid demand for higher entry-level wages.” [Educational Services]
“Close of first quarter business conditions are steady. Already projecting out for 2024. Economic uncertainty is still a concern, and interest rates are continuing to be monitored closely.” [Finance & Insurance]
“Although patient volumes and revenues continue to be strong, labor and inflationary pressures have led to higher operating expenses, exceeding revenues and resulting in negative operating margins. Supply chains issues are easing, leading to fewer stockouts, though inventory levels are not as healthy as preferred. Enjoying continuous improvement in (lead times), labor, price stability and product reliability. The near-term forecast is optimistic.” [Health Care & Social Assistance]
“Slowdown in the economy is leading to reduced expenditure amounts.” [Information]
“Our company continues to have a cautious approach to the future. Continuing uncertainty regarding inflation and oil and gas regulations.” [Management of Companies & Support Services]
“There continues to be uncertainty in the market regarding future investments. Interest rate hikes seem to have done little to slow down consumer spending. The likelihood of a mild slowdown in the second half of 2023 or 2024 is still pretty high. Layoffs will continue.” [Professional, Scientific & Technical Services]
“Increased stability in logistics and transportation services have helped stabilize the flow of goods and materials.” [Public Administration]
“Diesel fuel (prices) down 16 percent and unleaded down 9 percent from a month ago. Other than composite materials, most materials are readily available. Sales have dipped only slightly during this above-normal rainy season and are still consistent with normal winter sales.” [Utilities]
“Supply is starting to stabilize. Prices are coming down but in small increments. Food prices remain high, and availability continues to be a challenge.” [Transportation & Warehousing]