Dollar Firms, Yuan Softens

The US dollar remains firm after yesterday’s recovery. New concerns about the funding needs of European banks have been sufficient to offset the stronger than expected German IFO survey. Euro support is seen in the $1.2230-40 area. Sterling remains on the defensive ahead of what promises to be an austere budget.

China fixed the yuan higher, validating yesterday’s spot advance, but the yuan slipped about 0.25% against the dollar today. Asian currencies as a whole saw some of yesterday’s sharp gains pared back, with the Korean won, the big winner yesterday, leading the way lower today with a 0.85% decline. The yen is the strongest of the majors, despite a lukewarm reception to the government’s broad fiscal and growth strategy, encouraged arguably by a waning of the risk appetite. Dollar support is seen in the JPY90.40 area.

Global equities are lower after the reversal in North America yesterday. The MSCI Asia-Pacific Index and the Dow Jones Stoxx 600 are snapping a nearly two week advancing streak with today’s losses. Both are off around 1% today. In Asia we note that the Shanghai Composite was the only major market that managed to close higher today.

Domestic industries, like health care, industrials and utilities fared best, while telecom, basic materials and financials were drags. Following the downgrade of one of the largest French banks yesterday, it is not surprising that the financial sector in Europe is among the weakest sectors today, It joins basic materials and oil and gas as the weakest sectors, but all 10-major sectors represented in the Dow Jones Stoxx 600 are lower.

Risk aversion is seeing a safe haven bid return to US Treasuries and German bunds today. Peripheral European bonds are under pressure with 10-year spreads widening out 23 bp in Greece, 13 bp in Spain and 12 in Italy. Spain’s T-bill auction was well received, though the cost is higher yields. The 3-month yield rose to 91 bp from 64.5 last month and the 6-month bill yield rose to 1.57% from 1.26% in May. This week’s US coupon sales begin with $40 bln 2-year notes today.