Dollar: A Dove Warms to Taper, But Not Speculation
British Pound Faces a Bumpy Ride as BoE Weighs Outlook, Guidance
Australian Dollar Advances But Gains Limited after RBA Rate Cut
Euro Finds Little Comfort in Modest Italian GDP Beat
Japanese Yen Dangerously Close to Forging a Reversal
New Zealand Dollar Top Performer in Rebound after Dairy Export Scare
Gold Drops Below $1,300 Without Dollar’s Influence

Dollar: A Dove Warms to Taper, But Not Speculation
Despite another round of fundamental headlines that reinforces the probability of a September Taper timeframe from the Fed, the dollar took another tumble Tuesday. The session’s close marks the third consecutive decline for the Dow Jones FXCM Dollar Index (ticker = USDollar) – matching the worst performance for the benchmark currency in three months. Yet, in another unusual twist, the greenback’s slide happens to coincide with the biggest drop (0.6 percent) from the benchmark S&P 500 since June 24. Given the positive correlation between the favored safe-haven currency and risk-bearing equity index, this may not seem particularly out of place…but it certainly is. Should there be a committed move in speculative positioning – especially risk aversion – the negative relationship between index and currency is likely to return. So, once again, we are seeing some of the symptoms of a risk-based move but not the real conviction. Looking over the developments of this past session to establish our bearings moving forward, the June trade deficit dropped far more than expected to an October 2009 low of $34.2 billion (despite the rise in the dollar). Far more pertinent to our stimulus-supported markets nowadays, perpetual Fed dove Charles Evans offered suspiciously hawkish comments. Wednesday we have the Fed’s Pianalto and Plosser weighing in as well.

British Pound Faces a Bumpy Ride as BoE Weighs Outlook, Guidance
One of the top market-moving events for this week – and certainly the most ominous catalyst for Wednesday – is the Bank of England’s (BoE) inflation report. Sterling traders are still discounting a significant level of accommodation from the central bank as many believe the UK has ‘fallen behind’ in the stimulus game and the country risks falling back into recession without external support. However, economic data has reflected significant improvement in recent months and the BoE has backed off its previously moderate lean towards pursuing more easing. In fact, when new Governor Mark Carney took the helm for the first time at the July rate decision; the central bank not only kept its stimulus effort untouched, but the minutes showed the dissenters calling for more bond purchases in previous gatherings fell into consensus.

Despite the considerable divergence in expectations and outcome for UK monetary policy – GBPUSD dropped over 1,500 pips through the opening quarter in large part due to easing and recession concerns – we have yet to see a material retracement of the earlier losses. That is perhaps why we have seen such a strong reaction to data like manufacturing and service sector activity, housing and confidence surveys when they historically lack for influence. Therein lies the importance of the forthcoming quarterly inflation report from the BoE. This is not just an account on price pressures; it is an update on forecasts for all the important aspects for monetary policy. What’s more, in response to Chancellor of the Exchequer George Osborne’s request to review the remit, Governor Carney is expected to weigh in on whether the central bank will commit to forward guidance and perhaps even targets – like the Fed. More transparency at regular meetings could bolster speculation moving forward; but for this particular event, volatility and direction will come from the forecasts.

Australian Dollar Advances But Gains Limited after RBA Rate Cut
For a currency whose place amongst the ‘majors’ is established through its high-yield (carry) appeal, the Australian dollar’s appeal has taken a hit with the Reserve Bank of Australia’s (RBA) 7th rate cut in the past two years. And yet, despite a slide to a record low 2.50 percent benchmark yield; the Aussie dollar actually advanced against most counterparts through Tuesday’s trading session. This is a good example of two distinct truths about trading fundamentals in the markets: investors/traders are forward looking and the mass’ interpretation of a development is more important than the sterile academic interpretation. For this particular rate decision, the market was certain of the rate cut with 26 of 27 economists polled by Bloomberg expecting the move and swaps pricing in a 100 percent probability. In other words, the market was positioned for the cut and looking for guidance for future moves. What they read in the statement though, was a shift away from proactive easing.

Euro Finds Little Comfort in Modest Italian GDP BeatLike the Spanish release last week, Italy’s 2Q GDP update generated relatively little interest from the Euro. The Eurozone’s third largest economy posted a 0.2 percent contraction in the period through June – a smaller-than-expected slump but the 8th consecutive reduction nevertheless. There was fodder from this outcome to feed both the bulls and the bears if they so had the inclination. Yet, just as the sovereign and regional banking concerns that have shifted to the backdrop, so too has the immediate fear of the costs of ongoing recessions. In a market that is familiar with complacency, the Euro-area is perhaps the most detached. (New to EUR/USD trading? Watch this video).

Japanese Yen Dangerously Close to Forging a Reversal
The Japanese yen has slowly regained traction against its most significant counterparts and now faces a critical threshold to upgrading its intentions from drift to committed rally. Among the pairs to watch, USDJPY has dropped for 10-consecutive 8-hour candles for the most consistent decline in years, EURJPY stands at the cusp of a trend reversal at 130 and AUDJPY is just barely holding back from a deeper decline below 87.50. The spark that will make or break this move will not be Thursday’s BoJ but rather the Nikkei 225’s trend.

New Zealand Dollar Top Performer in Rebound after Dairy Export Scare
Despite unfavorable risk winds in international markets, the New Zealand dollar was the best performer over the past trading session. This change in performance is in stark contrast to the way the kiwi opened the week with a gap lower on the panic that arose after China announced a ban on certain dairy imports from New Zealand after it was discovered that export leader Fonterra sent product that may have contained botulism. Finance Minister English talked down the economic impact this would have, and this kiwi rebound will likely run out of steam quickly.

Gold Drops Below $1,300 Without Dollar’s Influence
A hearty 1.6 percent drop from gold Tuesday, carried the precious metal back below $1,300 for the first time since July 19. This acts as further confirmation that the prevailing bear trend that was established last September has reengaged after another failed revival through July. Yet, what makes this past session’s progress particularly interesting is that it developed without the support of the US dollar – the benchmark for measuring its anti-currency appeal. Those fearing a disorderly drop, the CBOE’s volatility index is steady and volume is so far restrained.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

1:30

AUD

Home Loans (JUN)

2.0%

1.8%

Home loans have continued to show growth in 2013 despite a downturn in the mining industry due to slower growth in China.

1:30

AUD

Investment Lending (JUN)

1.5%

1:30

AUD

Value of Loans (MoM) (JUN)

2.3%

5:45

CHF

SECO Consumer Confidence (JUL)

-1

-5

The print has not been positive since January of 2011.

6:30

EUR

Bank of France Business Sentiment (JUL)

French trade balance has remained below -400M since September of 2010.

6:45

EUR

French Trade Balance (euros) (JUN)

-5350M

-6014M

7:00

CHF

Foreign Currency Reserves (JUL)

431.0B

434.9B

Since September of 2011, CPI YoY has remained negative in Switzerland. Meanwhile, Foreign Currency Reserves continue to rise as the SNB continues to suppress the strengthening of the Franc against the Euro.