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By Andrew Wilkinson at IB:

With €442 billion in 12-month loans coming due on July 1, investors had become increasingly alarmed at the health of the banking system. Cash markets have become fragmented ever since the Lehman collapse sparked a financial rout and put counterparty risk well and truly under the microscope. And while the central banking approach worldwide has been to remain good to its label of “lender of the last resort,” worries had been running strong that banks couldn’t fund themselves and that they might be sitting less than comfortably on sovereign bonds that look like less safe bets than at the time of issue. Some, but certainly not all, of those fears dissipated today when the ECB awarded €131.9 billion in three-month loans to banks.

Euro – Stocks around the region rose as banking shares recouped losses inflicted earlier in the week after investors questioned the stresses and strains on the asset quality of Eurozone banks’ balance sheets. The combination of finite stimulus measures and a cast-iron decision to reduce spending among domestic governments has raised doubts about the future health of the 16-nation economic area bearing pressure on the single European currency.

Today, however, short players continued to face a squeeze finding it harder to understand precisely why the euro, for all its warts and blemishes, remains more than three cents above its earlier June lows. As they dashed for the exits they drove the euro to a peak above $1.2300 this morning. The euro made gains across the board and currently buys $1.2264 while against the yen it rose to ¥108.75 and against the pound it steadied to buy 81.65 pence.

U.S. Dollar – The dollar index is lower at 85.83 having reached 86.30 in the heat of Tuesday’s panic after the Conference Board revealed a slump in its reading of consumer confidence for June. Today the market braces for the Chicago ISM survey, which is still expected to display expansion although at a marginally slower pace. On Friday the latest government data regarding the employment picture will be released, which means that the run up starts today with an ADP private employment report. While the official non-farm payroll report is expected to show a net decline of 110,000 jobs, today’s ADP release showed a smaller than anticipated net private sector addition of 13,000 jobs by employers despite expectations of 65,000 fresh jobs.

Aussie dollar – A rally for sentiment has come to the rescue of the commodity currencies midweek after heavy falls inspired by prospects for an Armageddon-like showdown for China. Rationale for declining commodity prices was suspicious as longs quit the patch. The Australian dollar was also supported following a further monthly expansion of private sector credit indicating the economy maintains a steady pace of growth. An index of house prices also reflected ongoing domestic health. The unit rose off Tuesday’s lows at 84.65 U.S. cents to reach an early morning peak at 85.59 cents before losing its impetus to stand at 84.97 cents.

Canadian dollar – Following declines in several metals markets including copper, zinc and nickel the Canadian unit also rebounded by exactly one cent earlier to reach 95.50 U.S. cents. The Canadian economy has so far followed a LIFO cycle amongst G7 partners – it’s been the last-in-and-first-out of recession owing to its exposure to commodity demand, strong financial system and healthy fiscal stance.

Japanese yen – With some of the panic at least reaching a temporary halt, demand for the Japanese yen has eased by Wednesday. The yen has surrendered some of its gains against the dollar where it slipped to ¥88.75 but not before reaching its strongest price since the May 6 “flash-crash” at ¥88.28.

British pound – The British pound doesn’t seem to be taking full advantage of the improved risk environment today and has lost almost a full cent against the dollar at $1.4988. There were two minor data points to report with the Gfk NOP consumer confidence index possibly having a net negative impact on the pound. Meanwhile a Nationwide survey of home prices point to a minor increase, but the impact here is likely to be minimal. The pound fell against the yen to buy ¥132.91.