Currencies: "Greenback Steadies at Lower Levels, Sterling Struggles"

From Marc to Market:

The US dollar is mostly firmer against the major currencies. It is consolidating yesterday's losses more than staging much of a recovery. Even sterling, where a YouGov poll has the Tory lead at three percentage points, down from seven previously, is above yesterday's lows.

On the other hand, even strong data from Japan did not drive the yen higher. The dollar is holding in yesterday's range against the yen. If it does not rise through yesterday's high (~JPY111.25), it will be the sixth consecutive session of lower highs, since poking briefly though above JPY112 in the middle of last week.

Japan reported stronger than expected capital expenditures that point to the upside risks to the Q1 GDP estimate of 1.2%. Capex rose 4.5% year-over-year rather than 4% as expected. Separately, it was reported that corporate profits surged 26.6% on the back of a 5.6% increase in sales.

Even if the yen did not respond positively, Japanese stocks did. After rallying 2.4% in May, the Topix rose 1.1% today to start June. The Topix has advanced in seven of the past eight months and nine of the past eleven. Stocks in the region rose as the MSCI Asia Pacific Index added 0.3%. It was up nearly 2.6% last month. It has risen even month this year.

China's Caixin manufacturing PMI slipped below the 50 boom/bust level for the first time in nearly a year. The headline fell to 49.6 from 50.3. Output, however, held just above 50 at 50.2, down from 51.0 This differs from the official measure in a smaller sample and a focus on smaller businesses. Still, the sense the economy has lost some momentum after Q1 is not easily shaken, and the fact that input and output prices well are consistent with the pause in the reflation story of the start of the year.

The yuan's strength has continued today, into a fourth session. It is the strongest four-day run in more than a decade. The yuan had been trading in a narrow range in a low vol market, until this week. Following Moody's downgrade, which simply matched what Fitch had already done, many expected continued steady trading against the softening dollar. While the move began as a liquidity squeeze in the offshore market, the onshore yuan took charge today. It rose 0.17%, while the offshore yuan has softened by nearly the same amount. The strengthening yuan did little for equities, where the Shanghai Composite slipped almost 0.5%, and the Shenzhen Composite dropped 1.9%....MORE