Dollar Firms, Risk Aversion Strong

The US dollar is little is generally firmer in a risk averse environment ahead of the weekend. The notable exception is the Swiss franc, which is benefiting from tensions in the euro zone and the recent downgrade of deflation risks by the SNB. The euro ahs fallen to new record lows against the franc and has returned to yesterday’s lows against the dollar. The short-term market has caught long sterling. Yesterday’s poke above $1.50 saw buying dry up and profit-taking. Initial support may be seen near $1.4850, but the near-term potential could extend back toward $1.4700. The dollar is sidelined against the yen, trading in less than a 20 tick range around JPY89.60.

Global equities are heavy following after S&P 500 fell for its fourth consecutive session and amid disappointing earnings and/or guidance from several large North American names. The MSCI Asia-Pacific Index lost 1.6%. Concerns about the strength of the world economy and strength of the Japanese yen weighed on the region’s exporters. An unexpected hike (12.5 bp) by the Taiwan’s central bank saw the Taiex lose 1.5%, wiping out this week’s gains. The Nikkei and the Australia’s ASX 200 saw the biggest declines of the week at 2.6% and 3.0% respectively. The Shanghai Index, which lost 0.5% today, which after Hong Kong’s 2% advance is the best in the region with a 1.6% gain. European bourses surprisingly opened firm but have since trended lower and are mostly off around 0.75% near midday in London. Financials are actually among the better performing sectors even though S&P downgraded ABN Amro to A from A+, with a stable outlook. Oil and gas, utilities and basic materials are the weakest links.

Safe haven demand characterizes the bond markets ahead of the weekend. The US 10-year Treasury yield is off 3 bp to 3.10%. The 3% level is thought of as a key psychological level. Spreads in Europe are mostly widening, except for Greece today, which is seeing a little relief after the nearly 100 bp increase in yields in the first four days of the week. Still, the price of insurance in the credit default swap market set new records today. The Portuguese premium remains at record levels and while Spain and Italy are widening slightly, more pressure is being seen in Belgium and Austria. Note that central European bonds (and currencies) are under some pressure following news that the Romania’s Constitutional Court ruled some of the government’s austerity measures were unconstitutional.