Dollar Softer, Soft Demand ECB's Refi

Currency in Crisis

The US dollar is generally softer, consolidating yesterday’s moves. In fact, the three best performers yesterday and for the month of June, namely the Swiss franc, British pound and Japanese yen, are the laggards today. Month-end and quarter-end adjustments are commingling with normal market forces after outsized moves the previous day.

The key event of the day has been the 3-month ECB tender ahead of the expiry of the 12-month 442 bln euro funds tomorrow. The relatively low demand for the 3-month funds helped lift the euro to the session highs and encouraged some risk taking in other currencies and markets.

Asian equities trading heavily, but European markets are posting modest gains. The MSCI Asia-Pacific Index fell 1.3%, led by a nearly 2% decline in the Nikkei to seven month lows. Basic materials, exporters and chipmakers were among the weakest sectors. Those markets that were open late, however, like India, Singapore and Indonesia did manage to turn positive. European bourses are mostly 0.5%-0.8% higher, though Spain is gaining over 1.5% today, led by a recovery in the financials. Financials are also among the strongest sectors in the Dow Jones Stoxx 600 today, roughly doubling the 0.75% advance near-midday.

The successful ECB refi operation and the stabilization of global equity markets have taken eased the safe haven bid for Treasuries and bunds. This was too late for Japan though and benchmark 10-year JGB yield slipped 3 bp to 1.07%, the lowest in seven years. UK gilts are continuing to outperform bunds. The spread has narrowed 32 bp this month. Today the gilt yield is 3 bp lower at 3.35% , while the bund yield is 3 bp higher today at 2.38%. The 2-year schatz auction in Germany saw lukewarm reception at best, with a lower bid to cover and the Bundesbank keeping a relatively larger amount. Low yields and the uncertainty around the ECB’s operation may have deterred participation.