Bond markets remained an important focus during Monday with further ramifications for global risk conditions and asset markets. China also continued to have a major regional and global impact as money-market tensions remained very high. The PBOC weekend statement promising to fine-tune monetary policy failed to reassure markets to any great extent and there was a sharp decline in Chinese equity markets with the benchmark Shanghai index falling by over 5%. Although there was some resilience in other regional bourses, risk appetite remained fragile and commodity prices continued to decline. AUD/USD dipped to fresh 3-year lows just below 0.9150 before a recovery while USD/CAD advanced to the highest level since September 2011 with a peak above 1.0550.
The economic calendar was very sparse during the day with only the German IFO index of any great significance. The headline index edged higher to 105.9 for June from 105.7 the previous month which suggests that business confidence is holding firm and the institute was optimistic over second-quarter GDP. Any positive Euro impact was also stifled by a further increase in peripheral bond yields as Spanish and Italian yields both rose strongly, reinforcing fears that recessions would deepen once again.
US and global bond yields continued to rise with US 10-year benchmark yields pushing to the highest level for over 2 years at over 2.60%. Rising yields initially helped support the dollar and USD/JPY hit a peak just above 98.50 during Asian trading. The pair was, however, subjected to sharp selling during the New York session with lows around 97.25 as Nikkei futures dropped sharply and this was important in stemming wider dollar appreciation.
EUR/USD was confined to narrow ranges around 1.31 ahead of the US open with underlying selling pressure contained by some profit taking following Friday’s plunge. There was a retreat in early New York with lows at 1.3060 as markets tested a series of support levels, including the pivotal 200-day moving average at 1.3073. With players unable to take out support levels, EUR/USD rallied back to the 1.31 area in choppy trading conditions as overall dollar sentiment was still broadly bullish.
Bond markets attempted to stabilise later in the day which had an impact in paring immediate dollar demand. There was a significant recovery in the Australian dollar while Sterling rallied back to the 1.54 area after an earlier slide to two-week lows below 1.5350.