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Asian Session – Yuan’s slide halted but Japan’s economy contracts in Q2

Japan’s economy contracted by less than expected in the second quarter, shrinking by 0.4% quarter-on-quarter, against forecasts of a 0.5% contraction. This compares with growth of 1% in the first quarter and raises pressure on the Bank of Japan to expand its quantitative easing program amid the absence of any inflationary pressures. The drop in output in the second quarter came from weaker exports and a 0.4% fall in consumer spending.

The yen was little impacted by the GDP data as markets will now be shifting their attention to third quarter performance, which is likely to come into bigger focus for the Bank of Japan in adjusting their economic and inflation outlooks.

The dollar advanced against the yen in Asian session, rising to 124.47 yen, but fell against the euro and the pound. The euro briefly jumped above the 1.11 level but dropped back to 1.1076 dollars in late Asian trading. The pound was firmer against the dollar after Bank of England MPC member Kristin Forbes said that interest rates need to rise before inflation hits the 2% target. Sterling jumped to 1.5687 dollars before easing to 1.5663 dollars, while the euro fell to 0.7071 pounds.

Asian currencies stabilized after China set the yuan’s midpoint slightly higher at 6.3969 per dollar on Monday, versus Friday’s 6.3975 per dollar. Last week’s surprise depreciation of the yuan caused large losses in Asian stocks and emerging market currencies took a hit with the Malaysian ringgit falling to 17-year lows. The Turkish lira and Brazilian real have also come under sharp pressure from the yuan’s move on top of existing domestic economic and political troubles.

The Australian dollar was steady against the greenback on Monday as it held on to its gains after falling to a new 6-year low of 0.7214 last week on the yuan’s devaluation. The aussie was last trading at 0.7370 against the dollar but the kiwi was only modestly above its 6-year lows, standing at 0.6541 in late Asian trading.

Oil prices were struggling at the start of the week’s trading as concern’s over weak demand and oversupply continued to weigh on prices. WTI crude futures fell to 6-year lows at $41.93, while Brent crude was at $48.65 in late Asian session.

The rest of the day is likely to be very quiet with the only major release coming from the US. The Empire State Manufacturing index is expected to show improving sentiment in August.

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