USD/JPY: Weak US data & JGB auction in focus - MUFG

The US dollar has been consolidating at weaker levels overnight following yesterday's sell-off triggered by weak US economic data releases. It has resulted in the dollar index falling back towards recent lows at just below the 99.000-level. The US dollar came under renewed selling pressure yesterday following the releases of the latest ADP and ISM services surveys for May. The ADP survey estimated that private employment growth slowed more sharply than expected to 37k in May which was well below the consensus forecast of 114k, MUFG economist Lee Hardman reports.

BoJ is also set to announce updated JGB tapering plans

"It has heightened expectations that the release of the NFP on Friday could similarly reveal a bigger slowdown in the US labour market which has encouraged market participants to price back in more Fed easing. The 2-year US Treasury bond yield fell sharply yesterday by 8bps taking it back to its lowest level in a month. Looking back at the recent accuracy of the ADP survey as a predictor for NFP private employment growth, one can see that it has underestimated NFP private employment growth for the last three months to April by an average of -74k/month based on the initial data releases." 

"At the same time, the release of the ISM services survey revealed that business confidence continued to deteriorate in May falling to its lowest level since June of last year at 49.9. Weakness was most evident in the new orders sub-component which fell by 5.9 points to 46.4 and to the lowest level since December 2022. The impact of tariff hikes and heightened policy uncertainty is weighing on business confidence and lifting input costs. The decline in US yields indicates that market participants are putting more weight on loosening labour market conditions than higher inflation from tariff hikes when determining the outlook for Fed policy."

"The drop in US yields contributed to USD/JPY hitting a low overnight at 142.53 although it has since risen back above the 143.00-level. The main focus overnight in Japan has been the latest 30-year JGB auction after the recent sharp sell-off at the long-end of the curve. JGBs have reacted positively overnight with the 30-year yield dropping by 6bps to 2.89% as it moves further below last month's high of 3.20%. According to Bloomberg, the outcome from the 30-year auction was largely seen as being within the expected range providing some initial relief. The BoJ is also set to announce updated JGB tapering plans at their 17th June policy meeting. Recent comments from Governor Ueda have signalled that they are unlikely to slow the pace of tapering."