Talking Points:

Dollar Stabilizes as S&P 500’s Risk Run Cools
British Pound: Beware an Interest Rate Forecast Capsize
Euro Tumbles as Eurozone Bonds Surge

Dollar Stabilizes as S&P 500’s Risk Run Cools

Risk appetite trends took a marked step back in their most recent drive to record exuberance, and the breather was welcome by the safe haven dollar. The Dow Jones FXCM Dollar Index (ticker = USDollar) put in for a modest gain on the day, and its performance against its major counterparts was generally mixed. Yet, the potential is certainly stacked in the benchmark’s favor. In the incredible reach for return that has driven the S&P 500 to record highs, amplified leverage to unseenlevels and has short-term traders taking the reins from value investors; the greenback has surprisingly withstood a heavy bear swing. If the growth and return start to curb the push the long-term investors’ appetite for a risk build up and the traders at least temporarily fold on the dip buying, the turn in the current stands to materially support the dollar.

British Pound: Beware an Interest Rate Forecast Capsize

Interest rate expectations matter for the British pound. In the past 12 months, the sterling has advanced 5 percent versus the Euro, 7 percent against the Dollar and 11 percent at the loss of the Japanese yen. These gains were forged alongside a near doubling in the 10-year Gilt yield and 65 percent advance in the 1-year-2-year swap rate as a status quo outlook for interest rates turned definitively hawkish. Over the past week, we have seen a few surveys further bolster the expectations of hike potential amongst both speculators and average citizens. When there is a uniform expectation on an event like this, there is limited room for it to further build and far more risk that it starts losing ground. That is the risk that we face as a round of data starts to pick up today starting with April factory activity and the NIESR’s May GDP estimate.

Euro Tumbles as Eurozone Bonds Surge

It is an ironic but problematic situation the ECB finds itself in. Cutting rates last week and laying out plans to increase the central bank’s balance sheet is a sure-fire combination to see a currency lower…under normal market conditions. Given our current circumstances, the additional support acts as a further backstop for those seeking out higher returns with risky periphery Eurozone bonds. In fact, this past session, the Italian 10-year government bond yield plunged to a record low 2.70 percent, Greece’s 10-year fell to a four-year low 5.77 percent yield and Spain’s rate actually fell below that of its US counterpart. This is not to suggest that these are equivalents – much less preference – to the benchmark safe haven. Instead, it reflects the speculative side of monetary policy. If that risk bid takes a hit, EURUSD may quickly drop below 1.3500.

Japanese Yen Weather a Broad Range of Data With Little Currency Impact

When it comes to fundamental analysis, the first concern is: what actually matters to the market – or the trading masses that comprise the ‘market’. While the economic strength of Japan certainly matters to international investment managers, the carry trade implications of the low-yielding currency dampen this more academic aspect of the unit’s appeal. The data this opening 24 hours was heavy. April trade figures, a GDP revision and sentiment surveys seemed to bolster the yen’s fundamental profile. Yet, a risk positive lean also encourages Japanese and global investors to seek out higher returns – certainly greater yields than are found in Japan…

Chinese Yuan Rallies After Strong Trade Report, Stimulus Interests Peaked

The Chinese offshore Renminbi (CNH) is making a threat to turn its five-month bear trend versus the dollar once again. Following up on Friday’s move, the currency rose 0.3 percent versus the greenback Monday. There is certainly a risk element to this move as the Chinese market’s present investors with a far more competitive return. But that reach for return is certainly enforced by the data released on the open of the week. May’s trade report nearly doubled its previous month’s reading with a $35.9 surplus on a 7 percent jump in exports. The domestic issues related to a 1.6 percent drop in imports seem to be less pressing for now. Meanwhile, the murmur of Chinese stimulus never seems too far away. Despite the IMF’s advisement against further easing (focusing on reform instead), the country’s regulator made a vow to increase lending.

Emerging Markets Surge, FX Performance More Mixed

Risk appetite trends weren’t particularly strong on the day, but it proved strong enough to lift the emerging markets to new heights. The MSCI EM ETF just nudged above the October bullish swing with its highest close in 13 months. That capital market gauge’s three-day run was echoed by the Bloomberg Emerging Market Sovereign Bond Indexwhich mounted a fresh record high of its own. In the FX rankings, there wasn’t so uniform a vote of confidence. Heading into the World Cup Soccer tournament, Brazil’s Real offered up the best performance of the class with a 0.8 percent rally versus the dollar – which adds to a 2.2 percent, three-day run. Despite a warning by the Finance Ministry to watch measures that may lead to retaliation, the Korean Won was another impressive mover with a 0.4 percent climb. Amongst the more motivated bearish moves, the Mexican Peso dropped 0.8 percent despite more robust CPI data.

Gold’s ECB Stimulus Response Already Incorporated

European equities and fixed income continue to show the positive influence of the ECB’s fresh monetary policy support, while the currency is once against suffering the same. One notable absentee in moral hazard scheme is gold. The precious metal that was so prized during the height of the Fed’s and ECB’s initial stimulus arms race barely feigned a 0.8 percent rally after this past Thursday’s policy meeting and has slowly retreated since. The market seems comfortable enough bidding up higher return assets in the Eurozone despite the drop in benchmark yields or simply transferring to another currency and its markets. Meanwhile, demand for gold among ETFs remains at its near-five year low and net long speculative futures interest was cut another 19 percent last week. Even the retail bullish bid is easing back according to SSI.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

21:30

CNY

Consumer Price Index (YoY) (MAY)

2.4%

1.8%

A rebound in inflation pressures may create further difficulty for the PBoC’s balance between reform and growth

21:30

CNY

Producer Price Index (YoY) (MAY)

-1.5%

-2.0%

21:30

AUD

NAB Business Confidence (MAY)

Business sentiment has eased sharply in recent months

21:30

AUD

NAB Business Conditions (MAY)

21:30

AUD

Home Loans (APR)

0.2%

-0.9%

Credit figures in Australia becoming a more closely monitored aspect of the economy, just as they are in the US, UK and Eurozone

21:30

AUD

Investment Lending (APR)

-0.8%

21:30

AUD

Value of Loans (MoM) (APR)

-1.2%

5:45

CHF

Unemployment Rate s.a. (MAY)

3.1%

3.2%

Has fallen from 3.5% at the start of the year to 3.2%, an upbeat outcome unlikely to spur an SNB change.