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Daily FX Market Commentary

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Yen strengthens against dollar

Wed, Jul 8 2009, 07:00 GMT
by Danske Research Team

Danske Bank A/S

Key news

• Equity markets tumble on the back of lower earnings expectations and weaker-than-expected Japanese economic data.
• However, this was positive for US bond yields and supply concerns were not an issue at yesterday’s 3Y US Treasury auction, which saw strong foreign demand.
• Yen strengthens against dollar and euro as flight-to-quality drives the market on the back of weaker data and a slump in equities. SEK and NOK stable overnight.

Markets Overnight

US equity markets stocks tumbled yesterday, sending the S&P 500 to the lowest level since 1 May, on concerns that technology spending will slow and second-quarter earnings will fail to justify the four-month rally in the equity markets. The S&P500 slipped 2% in yesterday’s trade. The earnings season kicks off with Alcoa reporting Q2 earnings today.

The Asian equity markets followed the negative sentiment from the US markets and fell for the sixth straight day on the back of weaker Japanese data, which support the view that the recovery will take longer than expected. The Nikkei fell 2.3%, while Hang Seng is down 2% this morning.

The speculation on the weaker-than-expected recovery and that the recession in the US economy has further to run leads to a solid decline in US bond yields. 10Y US Treasury yields declined some 10bp from the intraday high yesterday, while 5Y yields dropped 5bp and 2Y was unchanged. The auction of 3Y US treasuries went well with a bid to cover 2.62, which was above the average seen over the past 18 months. Furthermore, there was a strong demand from foreign central banks. Hence, the possible negative impact on US treasuries from the significantly higher supply is currently being suppressed by the negative growth sentiment.

In the FX markets flight to quality dominated the trading with yen gaining against both dollar and euro. Yen broke through the 94.5-level against dollar this morning and is heading towards the 131-level against euro. EUR/USD is range-trading this morning around the 139-level. EUR/SEK has been stable overnight at the 11.06-level, and there has been no further selling like we saw yesterday. EUR/NOK has also been stable overnight at the 9.09-level.

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Published on  Wed, Jul 8 2009, 07:05 GMT