There may not have been too many investors waiting for the PBOC to announce the end of the 2 year currency peg at 7pm their time on Saturday but many forecasters had been looking for an announcement ahead of the forthcoming G-20 meeting.

The tone of the message from the PBoC is largely in line with what had been expected. It is implied that there will be no widening of the trading band from +/- 0.5% and every likelihood and the Chinese authorities will maintain their previous gradual approach to exchange rate appreciation implying that over the course of the next 12 mth or so the CNY may appreciate against the USD by around 5% of so.

That said, a move of this order was still significant enough to shake up the markets this morning. Countries which have relatively large exports into Chinese saw the biggest reaction in their currencies; the AUD/USD pushing to 0.8860 before profit-taking stepped in. Commodities received a boost in anticipation that China would be able to afford to increase their purchases and stocks received a fillip. Treasuries were hit hard on the assumption that lower reserve accumulation by the PBoC would lessen demand for US debt.

Already there are signs that the initial post-PBoC move is tiring. Oil prices, the AUD and European stock indices are generally off their best levels of the session. Last week's concerns over the health of the European banking sector remain undiminished. While the market has welcomed the announcement from the ECB that the results of the stress tests of 25 banks will be published, there are significant risks that bad news will be uncovered.

Given that investors could be reluctant to participate in the process of recapitalising these banks there is a threat that existing concerns over sovereign default risk could be heightened. While EUR/USD remains in a corrective uptrend on the daily charts, these fears should undermine upside potential for the EUR going forwards.

Sterling has managed to pull back a little ground vs the EUR this morning, though essentially the currency pair is trading sideways close to Friday's closing level. The UK Jun Rightmove house price survey was relatively encouraging showing house prices up 5.0% y/y, but the main focus for the week is tomorrow's budget.

The government have been at pains to point out that this budget will be aggressive in its austerity drive. Former MPC member Blanchflower this morning commented that the emergency budget looks certain to push the economy into double-dip recession. These fears are shared with other leading economists though the market as a whole seems more in tune with the government's view that a timely reduction in funding costs which enhance the potential of the economy.

There are no key US or Canadian economic data releases today

Jane Foley

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