FOREX TRADING

Bond prices made limited headway allowing yields to diminish as investors awaited the outcome of European bank stress-testing due out on July 23. After a poor close at the end of last week yields are creeping lower once again as investors attempt to unravel the limited amount of information available ahead of publication of the report. As they try to see through the reports investors are trying to get a sense of what the public sector would do in the event of a private sector failure. German Finance Minster Wolfgang Schaeuble heading to the meetings said the reports would be an important test towards easing investor concern about the strength of banks.

European bond markets – European investors remain nervous ahead of the reports and as European finance ministers congregate in Brussels to discuss the stress-testing process. What’s unwinding is a sense that investors of course won’t be able to take the raw data and close the book on the stress testing affair. Rather they will want to know precisely the policy response in the event of a domestic bank becoming insolvent. Due to the rising amount of uncertainty surrounding the examinations performed by banking supervisors investors are once again resorting to the safety of fixed income investments. The September German bund contract stands 37 basis points higher at 129.26 after the DTB temporarily suspended trading owing to a couple of sizable volatility linked trades during the early morning. The 10-year yield declined by four basis points to 2.59%. Euribor futures are around six basis points higher sending implied cash rates lower after short-end pressures returned to cash markets following an ECB cash drain.

British gilts – There was no revision to first quarter growth in the U.K. where economic growth contracted by 0.2% year-over-year. Meanwhile a jump in the current account deficit served up warning that the economic recovery could be easily thwarted under the burden of spending cuts. Gilt futures didn’t like the news and shed nine ticks to 121.20 where the 10-year yield remained unchanged at 3.33% as surrounding benchmark bonds advanced.

Eurodollar futures – An early pocket of strength in futures for treasury market debt has fizzled in light of a recovery in the prospects for stock index futures. The September treasury note future earlier peaked at 122-10 before heading towards the session low at 121-28. Eurodollar futures meanwhile wobbled in early trading and stand lower by one pip.

Japanese bonds – Upper house elections were a disaster for the ruling DPJ as it lost more seats than its Prime Minister had wanted, putting into question the ability of the already coalition-status government to muscle through reform of the sales tax in a move that would help reduce the budget deficit. However, the specter of a Bank of Japan move towards further government bond buying appeared as a result, which helped shave three pips off bond yields as bond buyers drove a gain of 28 ticks for the September JGB future to 141.49.

Australian bills – Aussie 10-year yields inched one basis point higher to 5.10% as the risk appetite mood stalled. Bill prices were marginally higher as regional equity prices also hit a brick wall after last week’s rally. Home lending data rose a robust 1.9% during May according to data reported today, while investment lending data also recoded an improvement.

Canadian bills – Canadian bond prices also rose on Monday after a tumultuous week that saw the yield on the two year jump almost 30 basis points in just three days after data depicted a glowing recovery. The September contract added 11 ticks this morning to 122.74 where the implied yield on the 10-year government bond stood at 3.21%.