Dollar: Is There Enough in ISM Services Data to Stoke Taper Talk?

Dollar: Is There Enough in ISM Services Data to Stoke Taper Talk?
Euro Circles Suggest ECB Backing Off Stimulus Escalation Option
Australian Dollar: In-Line GDP Nudges RBA Rate Cut Expectations
Japanese Yen Unmoved by Increasingly Colorful Warnings
British Pound: Will Service Sector Round Out Recovery Hopes?
Canadian Dollar Traders Watch Demand for 30-Year Bond
Gold Volume 2-Month Low, ETF Holdings 2-Year Low, Futures Interest 4-Year Low

Dollar: Is There Enough in ISM Services Data to Stoke Taper Talk?
A valiant effort was made by the US dollar to regain some of the significant ground lost on Monday. Yet, the rebound wouldn’t fully balance the greenback; and the currency subsequently looks more sensitive to disappointing news than encouraging. Without further fundamental support, the Dow Jones FXCM Dollar Index (ticker = USDollar) is notably fatigued having rallied to near-three year highs. To keep the drive intact – especially against the current of persistent stimulus hopes – bulls need convincing. A market-wide deleveraging on risky positions would be a windfall for the safe haven dollar, but that potent scenario shouldn’t be depended on given the persistence of benchmarks like the S&P 500.

Turning sentiment would be a serious fundamental feat, but it can be leveraged under the right conditions. Rather than awaiting a financial crisis hot spot, realization that fundamentals don’t match price, witness excessive leverage collapse in on itself; the most sinister spark would be to remove the source of investors’ indomitable confidence: threaten stimulus. The upcoming list of ISM service sector activity, ADP employment and Fed Beige Book could tap that nerve. Though, a weak showing like the factory report Monday could spur ‘QE-infinity’ expectations.

Euro Circles Suggest ECB Backing Off Stimulus Escalation Option
While some of the Euro-related headlines crossing the newswires would sink any other currency, this thick-skinned benchmark seems to be tolerant of all but a verifiable financial crisis. In other words, something has to be on fire (figuratively-speaking) before investors really respond. This is years of conditioning where future problems have become part of the investment scheme and domestic capital faces greater bearers to moving money outside the regional boarders. That said, a headline from this past session that is unlikely to be ignored – ‘ECB sources’ were quoted as saying the central bank was split on whether they would pursue further cuts to the refinancing rate and that an open-ended and active QE-like program (similar to the Fed and BoJ) was off the table. That is important chatter ahead of Thursday’s rate decision. Keeping the euro rate and restraining the ECB balance sheet is a boon to the euro…that is until a lack of support undermines financial markets.

Australian Dollar: In-Line GDP Nudges RBA Rate Cut Expectations
The third day of meaningful event risk for the Australian dollar did little to turn the currency’s controlled decline. This morning, the 1Q GPD (gross domestic product) report showed a slight miss of the consensus forecast with a 0.6 percent increase through the three-month period that tempered the year-over-year pace to 2.5 percent. Neither of these figures is particularly discouraging, but that didn’t stop the Aussie dollar from extending its slide. ‘In-line’ data doesn’t cut it at the moment as selling pressure is riding on quickly falling market rates in Australia and a questionable appetite for tepid yield. The one-month, Australian market rate is at hovering at a multi-decade low. If risk aversion starts to rear its head, this weakened currency will find itself on the next stage of a very serious bear leg.

Japanese Yen Unmoved by Increasingly Colorful WarningsWe have been here before. In years past, financial and monetary policy officials have attempted to manipulate the yen exchange rate by threatening (‘jawboning’) the market and even engaging in one-off interventions. Over time, the effort lost nearly all of its influence over the markets and severely undermined the credibility of both government and central bank – in other words the investors doubt they will be able to meet their stated objectives. After a period of clear success in turning guidance into market movement, it seems we are reverting back to the old ways. This morning Japanese Prime Minister Shinzo Abe – apparently troubled by the sustained decline in the Nikkei 225 and creep higher for the yen – stated that he vowed to ‘slay the deflation monster’. Despite a further slew of economic initiatives and the colorful metaphor, both equities and yen crosses dropped soon after. If all the loose speculative capital has been drawn in, there may be little that can be done.

British Pound: Will Service Sector Round Out Recovery Hopes?
It seems there as something to that positive, 1Q GDP report. While the showing was rather tepid compared to global counterparts, the fact that the economy parried a ‘triple dip’ recession was a source of cautious optimism for many. Given the showing of PMI figures for May activity levels, that tentative trend may be the sign of something far more engrained. So far this week, Markit’s manufacturing activity report return to growth (a read above 50.0) and a 14-month high; while the construction report similarly return to expansion and a 7-month high this past session. Up next we have the service sector report. Will this indicator forge a positive growth outlook before the BoE meets?

Canadian Dollar Traders Watch Demand for 30-Year Bond
The Canadian dollar gave back much of the ground gained against its US counterpart Monday the subsequent session. While the greenback’s recovery played a big party in this turn, the loonie itself was notably under pressure against most of its counterparts. That said, with both the AUDCAD and NZDCAD moving in favor of the Canadian currency, it becomes clear that a scale of carry was a factor in FX performance on the day. On the economic side, Stats Canada reported an April trade deficit of C$ 570 million – larger than expected. Though a relatively small net debit, the 9.2 percent and 14.8 percent drop in European and Japanese exports respectively should keep our attention for next month. Tomorrow, the auction of a 30-year total return bond will be a good measure of the currency’s investment and yield appeal.

Gold Volume 2-Month Low, ETF Holdings 2-Year Low, Futures Interest 4-Year Low
If gold bulls are looking to mount a recovery, they are seriously lacking the necessary manpower to overtake $1,425 – much less retake the $1,500 floor crash back in April. Activity levels for the precious metal (measured using the Average True Range indicator) have cooled as the bounds on congestion continue to tighten. Contrarians could consider this a tempting sign of complacency and therefore a breakout opportunity. Yet, the standard evidence of tense restraint is absence. Looking to the SPDR Gold ETF, volume hit a two-month low of 5.5 million shares. Adding to that measure of disinterest, the unwinding of ETF holdings of gold continued this past session for a 17th consecutive day if selling that has shed 18.6 percent of peak holdings to a two-year low 68.86 million ounces. Perhaps of greatest interest is the recent tumble in futures interest. Open interest (participation) dropped over 15 percent the past week to a four-year low 376,000 contracts.
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