Talking Points:

Dollar Slumps Despite ‘Academic’ Improvement in Data
British Pound Traders Await Carney’s Testimony on Forward Guidance
Euro Slips as PMI Figures Reflect More Reason for Stimulus

Dollar Slumps Despite ‘Academic’ Improvement in Data

There is frequently a difference between how the textbooks say specific fundamental developments should impact the market and how the events actually shape price. Through the traditional channels, we would expect the combination of improved US economic data, higher US Treasury yields and a modest uptick in FX-based volatility measures to lift the greenback. That wasn’t the case Monday though. Despite every one of those factors, the dollar lost ground against all of its major counterparts. Why the departure from convention? Conviction. Data did not materially alter rate forecasts, volatility is just off record lows (for the currency market) and the competitive view of US investments over international counterparts was little changed by the data. That said, the small changes add up over time.

Looking more critically at the developments through the past 24 hours, the reaction to the FOMC rate decision is looks a little bit more overzealous of the doves (and dollar bears). The Chicago Fed’s National Activity Index climbed more than expected in May (0.21) while Markit’s manufacturing activity survey for the current month hit a series high (only going back to 2011). Net, that reinforces the central bank’s obstinacy in keeping its optimistic growth forecasts beyond the 1Q GDP slump and thereby lifts rate hike expectations marginally. Indeed, the 2-year yield rose 1.8 percent the past session.

In the upcoming session, the event risk may come across a little more clearly for what truly matters to the dollar. On the data side, the Conference Board’s consumer sentiment survey and a range of housing data will offer updates on the backbone of GDP (consumer spending) and a sector that is proving a concern much of the developed world (housing). More interesting perhaps is the range of Fed speeches on tap. In particular, Philly Fed President Charles Plosser is set to discuss the outlook for the economy and monetary policy. This is good occasion to watch the dollar, yields and capital benchmarks like equities in concert.

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British Pound Traders Await Carney’s Testimony on Forward Guidance

Central bankers aim to curb volatility and excessive speculation in the exchange rates and broader financial markets. That hasn’t worked out very well for the Bank of England (BoE). Just a few months ago, the policy group was adamant in its stance against early rate hikes and the focus on fostering the UK’s economic recovery. Yet, just these past few weeks, we have heard a very different tune. A remark of surprise from the BoE minutes that a 2014 hike wasn’t more heavily speculated on by the markets seems to directly contradict the previous effort of dovishness. So what is the central bank aiming to communicate? We will find out more today when BoE Governor Carney and a few of his MPC colleagues testify before parliament on the inflation report. Watch speculation for timing of a first hike and pace of subsequent moves.

Euro Slips as PMI Figures Reflect More Reason for Stimulus

Following the round of rate cuts, end to sterilization and targeted LTRO announced at the last ECB rate decision; the next move to speculate on for the central bank is whether they will pursue an outright purchasing program. Policy officials themselves have stated openly that this is an option that is being looked into and a few seem confident that it is but a matter of time. When we have data like this past session’s drop in June PMI figures, it only furthers the justification for easing. Will the ECB – and more importantly speculators – see it that way?

Japanese Yen: Kuroda Remarks Plenty of Buffer Before Any QE Upgrade

The BoJ keeps pulling back the safety net on the high-flying Japanese yen crosses. In commentary Monday, Governor Kuroda remarked that the central bank will be more tolerant of a mid-term correction in price pressures back from their objective of 2 percent target for core CPI. The central banker said a pullback to 1 percent is possible before a rebound towards target was likely. What does this mean for traders? While it is may not be reason enough alone to encourage deleveraging of the yen crosses, it means a risk-generated retreat won’t hold up on BoJ hopes.

Australian Dollar: Yields Drop Despite a Rise in Carry Appetite

Appetite for the carry trade – and the Aussie dollar as a carry currency – rose Monday. Yet, Aussie yields continue to retreat. The yield on the 10-year Australian Government bond was at its lowest level in 12-months (3.643 percent) having slid 18 percent from its peak seven months ago. A decline in expected return, however, hasn’t put a cap on demand for equities, emerging markets nor other relatively higher-yielding assets. As evidence, this morning the country auctioned off 20-year inflation-adjusted bonds to high demand.

Emerging Markets Advance Faster than Developed World Equities

The MSCI Emerging Market ETF was little moved on the day – in line with the performance of US equities through Monday’s close. Yet, the EM currency group fared surprisingly well. Looking at the list of liquid fiat, we find the majority were in the green, and stand outs like the Russian Ruble (0.9 percent), South African Rand and Brazilian Rand (0.5 percent) generated more significant gains than other asset classes.

Gold Still Cool after Last Week’s Incredible Breakout

Traders still have the taste of volatility in their mouths following last week’s incredible breakout and rally from gold. Yet, that one-day still has not drawn the metal into a meaningful trend – whether bullish follow through or speculative retracement. As with most other asset classes gold’s volatility reading is exceptionally low (a 14-month low). Meanwhile, COT figures show futures speculators increased long interest 28 percent.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

2:00

CNY

Conference Board Leading Economic Index (MAY)

6:00

CHF

Trade Balance (Swiss franc) (MAY)

2.43B

The Swiss franc’s refusal to depreciation against the Euro has muted exports from a key trade partner

6:00

CHF

Exports (MoM) (MAY)

0.6%

6:00

CHF

Imports (MoM) (MAY)

-0.5%