Following up its words with action, the PBOC set its reference rate at 6.798 yuan per US$, up from 6.83 that has been in place since July ’08 but the daily trading range will remain at .5% of this level. Knowing the gradual process the revaluation will be, Asian markets took a breather overnight. European credit remains on the forefront of concerns as yields in Spain, Italy, and Portugal are all higher. Spain sold 3 and 6 mo bills at yields higher than a month ago but at good bid to covers. S&P did make cautious comments on Spanish banks while Moody’s said the Spanish banking system is not as bad as the market believes as long as the ECB keeps providing funding. Greece, which has a full credit backstop from the Euro region for 3 years, still has zero respect in the market as their 2 yr yield is higher by 26 bps at 9.1%, the highest since May as the market seems to believe this debt has to be restructured notwithstanding their bailout package.
Also impacting European trade is their response to yesterdays after the market downgrade of the credit rating of French bank BNP Paribas which is down 3% today. June German IFO business confidence did rise to the highest since June ’08 as a weak euro gives a boost to their exporters whose business makes up about 40% of their economy. The one fly in the # was the Expectations component which was a touch below forecasts. The spending cuts and tax hikes in today’s release of the UK budget and its expected drag on UK growth has the 10 yr Gilt yield falling to the lowest since Oct ’09. The global debate of when to start dealing with deficits will be a main topic of discussion at the upcoming G20 with the fate of the theory of Keynesian economics hanging in the balance.