After big moves in the financial markets this week, currencies and equities are trading quietly today with Japanese stocks rebounding overnight, European shares moving higher and U.S. equity futures pointing to a positive open. The dollar continued to trade higher against all of the major currencies but the gains are modest so far compared to the past 48 hours. There are no U.S. economic reports on the calendar but investors were relieved that the People’s Bank of China stepped into the market to ease their credit crunch.

There are 2 primary catalysts for the recent volatility in the markets – the Federal Reserve’s plans to taper and the big spike in overnight lending rates in China. As we wrote in yesterday’s note U.S. and Chinese Central Banks Wreck Havoc on the Markets, overnight SHIBOR (Shanghai Interbank Offered Rate) rates – China’s version of LIBOR – spiked to a record high of 13.44%, up from 7.66% the previous day. Thanks to liquidity injections by the PBoC last night, the rate has fallen 495 basis points to 8.492%. While this is still more than double last month’s rate, it is a huge relief for the markets in China and abroad because it suggests that the central bank is no longer punishing speculators by holding the market hostage. Since the Dragon Boat holiday 2 weeks ago, China had been in an ever worsening credit crunch and instead of easing liquidity like they normally do during the holidays, the PBoC stood on the sidelines with their arms crossed. China experts say that this was the central bank’s way of punishing speculators and banks for over-lending and putting themselves into a cash shortage situation. While today’s action still keeps cash expensive in China, the deep pocketed central bank’s willingness to help means they are not completely hard-nosed but banks and speculators shouldn’t expect the PBoC to be as generous as they have been in the past.

Meanwhile renewed political trouble in Greece is weighing on the euro. According to party officials, Greece’s small Democratic Left Party could pull out of the ruling coalition. The IMF also threatened to suspend aid to Greece at the end of June if Eurozone leaders do not close the financing gap in the Greek aid program. Eurozone Finance Ministers did not address the issue at their meeting on Thursday.

The Canadian dollar also traded lower against the greenback after retail sales and consumer price growth fell short of expectations. Despite significant improvements in the labor market, Canadian retail sales grew only 0.1% in April and excluding autos consumption fell 0.3%. CPI on the other hand grew only 0.2%, compared to a 0.4% forecast. These weaker reports will keep monetary policy steady and limit the optimism of Bank of Canada Governor Poloz.

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