Mixed news out of Asia and Europe in the overnight has kept risky assets from moving higher, keeping the US Dollar supported thus far in the second week of October. On the second day back from Golden Week, the People’s Bank of China announced over ¥250 billion in reverse repos to inject liquidity into financial markets, boosting demand for the commodity currencies, the Australian, Canadian, and New Zealand Dollars.

With all three currencies at critical levels of support against the US Dollar, we’ll see over the coming days if this markets a near-term bottom in sentiment regarding China, allowing the commodity currencies to move higher; I think it is possible.

Whatever knock-on effect high beta currencies and risk-correlated assets may have gotten from the PBoC’s measures, the European currencies were completely absent from the move: the British Pound remains under pressure amid increasing QE chatter – the economy remains weak, the fiscal picture is tightening, and the Bank of England’s current package is set to expire; the Euro has been hamstrung by commentary from European Central Bank President Mario Draghi and the International Monetary Fund, warning on European growth prospects; and the Swiss Franc’s fate has been and will be determined by the Euro for the foreseeable future (the Euro and the Swiss Franc have maintained a +0.94 daily correlation since September 6, 2011).

Taking a look at credit, peripheral European bond yields are mostly lower. The Italian 2-year note yield has increased to 2.250% (+5.0-bps) while the Spanish 2-year note yield has increased to 3.145% (+7.9-bps). Likewise, the Italian 10-year note yield has increased to 5.058% (+0.5-bps) while the Spanish 10-year note yield has increased to 5.718% (+4.1-bps); higher yields imply lower prices

Issue Date: 11 Oct 2012