Greenback Steadies at Lower Levels, Sterling Struggles

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
   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.  

Japanese 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
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
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

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%.  

The eurozone manufacturing PMI matched the flash reading of 57.0, which
is an improvement over April’s 56.7. 
The composition was a little
different.  The German flash was tweaked higher to 59.5 from 59.4, the
highest in five years.  Exports, new orders,
and employment are all at multi-year highs.  The French PMI was revised to 53.8 from the flash reading of

Spain’s manufacturing PMI rose to 55.4 from 54.5This was stronger than expected and brings it
back to near the year’s high in January at 55.6.  Italy’s PMI
disappointed.  It eased to 55.1 from 56.2.   Nevertheless, it is
above the Q1 average of 54.6 and above last year’s average of
52.3.    Also helping blunt the disappointment was the upward
revision in Q1 GDP to 0.4% from 0.2%.  This
appears to be the fastest quarterly pace since early 2011.   It
brings the year-over-year pace to 1.2% from 0.8%.  

The UK’s PMI did not fall as much as expected.  It slipped from
57.3 in April to 56.7 in May.  The April reading was the best for at least three years, and the pullback in
May is minor.  The past decline in sterling may still be helping the
tradeable goods sector.  Meanwhile, the focus is on next week’s
election.  Although the Tories’ lead has narrow over the past month, five
of the six best known UK pollsters reportedly see it majority growing to at least
40 seats.  The first-past-the-post system allows for a discrepancy between
the percentage of the popular vote overall and the number of seats in

The euro briefly extended yesterday’s gain and peaked just shy of $1.1260
before drifting lower in the European morning.
  Initial support was seen near $1.1220, which was the lower end
of the range in the US yesterday after
the equity market opened.  The market does not appear to have exhausted
the upside.  Sterling peaked near $1.2920 yesterday and is not showing the
same resilience as yesterday. It posted an outside up day yesterday, but there has been not follow
through buying today.  Yesterday’s low was near $1.2770, and it may have
to be re-tested.  Pressure is also evident on the crosses, with the euro
pushing near GBP0.8750 that has capped it in recent days but appears headed toward GBP0.8800 around the mid-March
high.  The high for the year was in mid-January
near GBP0.8855. 

The ADP job estimate and auto sales are the most important US reports
  A negative surprise here is more important than a negative
surprise on the manufacturing ISM.    A rise in construction
spending would also help underpin expectations for a rebound in Q2
growth.  However, the key takeaway this week from some Fed officials,
including Governor Brainard, and the Beige Book, is that after the presumed
hike on June 14, there is a sense of caution.  It does not so much steam from the growth side or the labor market. 
It is about core inflation and whether it is still moving toward the target.  Also, after the big draw down in
the API estimate of US stocks, the DOE’s estimate today will be closely
watched.  Oil prices have steadied today after the July light sweet
contract fell 2.7% yesterday.  


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