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Asian Session – Yen rises on risk-off, pushing dollar below 102 yen; Pound slips below $1.32

The yen headed higher on Tuesday as risk-off trading put the Japanese currency back in demand. Uncertainty about the outlook of the global economy following Britain’s decision to leave the EU, as well as renewed concerns about the health of China’s economy drove investors to the safe-haven yen.

The dollar slipped below 102 yen in Asian trading, hitting a low of 101.77 yen in late session. The euro and the pound saw sharper falls, with the euro dropping 0.8% to 113.45 yen, while the pound was down 1.5% at 134.13 yen.

There was little reaction to disappointing services PMI that indicated a contraction in Japanese services activity in June.

In contrast, services PMI out of China today showed services activity in the country rising to an 11-month high. The Caixin services PMI increased from 51.2 in May to 52.7 in June. However, the composite PMI, which includes both manufacturing and services components, fell from 50.5 to 50.3, raising concerns that the buoyant services sector may not be able to offset the declines in manufacturing.

China’s currency, the yuan fell to another 5½-year low on Tuesday despite a firmer midpoint fix by the People’s Bank of China. The yuan last stood at 6.6694 per dollar in onshore trading today.

The Australian dollar was unable to keep up with yesterday’s impressive gains and was once again testing the 0.75 level against the US dollar. The aussie fell at the start of Asian trading following weaker-than-expected retail sales and trade figures. Retail sales in Australia rose by 0.2% month-on-month in May instead of the expected 0.3%. Meanwhile, the trade deficit widened sharply from a downwardly revised A$1.8 billion in April to A$2.2 billion in May.

Today’s main event for the aussie though was the Reserve Bank of Australia’s decision to leave interest rates unchanged at its latest policy meeting. Although, no rate cut was expected at today’s meeting, analysts were surprised that the RBA did not provide any guidance on future cuts in its statement despite the fresh downside risks to the global economy from Brexit.

However, most economists expect that the RBA will cut rates again later this year and this drove the aussie lower after a brief spike upwards from the surprise statement.

The pound was down sharply in late Asian trading on Tuesday as news that a major UK bank had suspended trading in one of its real estate funds due to large outflows raised concerns that more capital outflows from British investment assets will follow. Sterling was down 0.9% at 1.3177 against the dollar, while the euro was up 0.6% at 0.8443 pounds.

Reports that the Bank of England may reduce the amount of capital that banks are required to hold did little to calm market nerves. There is speculation that the Bank may lower the counter-cyclical capital buffer for UK banks in order to free up funds for lending and keep liquidity flowing following the shock Brexit vote.

Coming up later today, the UK services PMI will be watched following yesterday’s surprise slump in the construction PMI. Eurozone retail sales and the final services PMI will also be eyed in the European session, while in the US session, durable goods orders and a speech by the Fed’s Dudley will be the main data to look out for.

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