Dollar at Risk of Reversal if Fed Hints at More QE
Euro Strengthens after Cyprus Approves Bailout, Slovenia Next?
Japanese Yen Consolidation Looks Dangerously Like Breakout Risk
Swiss Franc Posts Impressive Rally as SNB Reports 11.2 Billion Profit
Canadian Dollar Rallies a Fifth Day against Greenback on GDP Data
Australian Dollar Little Moved Despite 4 Year Low in Manufacturing
Gold at Risk of Breakout as Congestion Solidifies, FOMC Approaches

Dollar at Risk of Reversal if Fed Hints at More QE
With Tuesday’s 0.3 percent decline, the Dow Jones FXCM Dollar Index (ticker = USDollar Index) has dropped for five consecutive days. Matching the longest series of declines since January 2012, we may see a true break to trend reversal depending on how the Fed judges policy. A look at the greenback’s chart presents a currency at the floor of a two-month congestion pattern just above 10,400 and meaningfully capped by 10,600 – the mid-point of the index’s range over the past five years. In other words, this aggregate measure of the US dollar reflects indecision at a two-and-a-half year high; which presents a considerable risk of reversal. The same risk is present with many of the greenback’s most liquid counterparts. EURUSD stands just below 1.3200, USDJPY is eying 96.50 and GBPUSD is knocking on the mid-point of this year’s range at 1.5575. A definitive catalyst is the best means for sparking a breakdown or driving the dollar back from the brink.

It is important to recognize something immediately with the upcoming Federal Open Market Committee’s (FOMC) rate decision: the policy group is unlikely to change its actual policy. That means that we shouldn’t expect a change to the current extracurricular stimulus program (also called QE3) – much less a change in rates. However, that doesn’t mean the event is not going to be market-moving. In fact there is a high probability of a significant reaction from the dollar and other risk-sensitive assets depending on how the deliberations go. The Fed’s influence is tied to the market’s speculative effort to time the slowing and eventual end of the $85-billion-per-month stimulus effort.

Over the past few months, central banker commentary has led to the impression of a shifting ‘mean’ amongst policy officials that the QE3 program should be slowed sometime in the third or fourth quarter and possibly ended by year-end. This leads to tentative optimism for the dollar but it also is a source of fear for those that would otherwise plow into riskier assets. As a measure of global return potential, the aggregate 10-year government bond yield from the majors is just off its lowest level on record. This extreme lack of return contrasts record highs in benchmarks like the S&P 500, yet it is sustained by the assumption that central banks will prevent adverse price movements though their efforts. It is this same belief that would leverage a dollar breakdown and risk rally if stimulus were expanded for longer than previously thought…

Euro Strengthens after Cyprus Approves Bailout, Slovenia Next?
The EURUSD’s jump above 1.3100 this past session has generated a variety of fundamental explanations between a reaction to US data and speculation that a rate cut from the ECB was somehow being construed as euro-positive. Looking for a low-impact catalyst or contradictory fundamental reaction to generate a move, a more practical explanation is the relief that was drawn from the Cypriot Parliament’s vote (29-27) to approve the bailout terms that the EU and IMF laid out. While this is just a necessity to maintain the status quo – jumping from crisis to crisis – it nevertheless offers buoyancy. Follow through, on the other hand, is a different animal. Cyprus is at the same point in the austerity / recession point of the curve that Greece was two years ago. We are certain to revisit. In the meantime, Slovenia was downgraded to ‘Junk’ status this past session; possibly signaling the next member to eventually request a bailout. The country is due to auction debt off today – a way to gauge the market’s confidence. These interests / concerns will be temporarily set to the backburner though until the ECB decision Thursday.

Japanese Yen Consolidation Looks Dangerously Like Breakout Risk
USDJPY isn’t the only yen cross to develop a dangerous bout of congestion. Sideways chop isn’t particularly uncommon for the yen crosses, and previous instances have often ended with a refreshed drive higher. However, the recoil before a volatile spark is a common scenario. The mix of data from yesterday’s docket is not the type of event risk that can spur the currency to action however. Currently, the stimulus expectations from the Bank of Japan are a constant hum in the back of the market’s mind to keep the crosses buoyant when everything else is stable. The variable risk is general ‘risk trends’. The FOMC rate decision and Friday’s NFPs are particular adapt, global sentiment movers.

Swiss Franc Posts Impressive Rally as SNB Reports 11.2 Billion ProfitIt was an uncommon site Tuesday. The Swiss franc managed to generate its own momentum without a fundamental push from either the Euro’s own bearing nor a change in appetite for safe havens. The Swiss National Bank (SNB) reported the results of their operations through the first quarter. An 11.2 billion franc profit from their intervention effort (hold EURCHF above 1.2000), is a welcome relief from a troubled regime. That said, news that a greater percentage of equities (15 percent) and lower quality assets was taken sets a tone of risk akin to the speculative ranks.

Canadian Dollar Rallies a Fifth Day against Greenback on GDP Data
We react to the US, UK and Eurozone GDP figures as they give guidance to the larger trends of activity and influences on monetary policy. However, Canada’s own growthreports carry less weight. The update this past session was the monthly reading for February. The 0.3 percent reading sets a pace for the quarter that tops the 2012 clip, but that doesn’t necessarily tap rampant speculative optimism.

Australian Dollar Little Moved Despite 4 Year Low in Manufacturing
If there is any central bank that is on the verge of rate cuts, it would be the Reserve Bank of Australia. That said, mounting evidence of a slowing economy doesn’t seem to speak to nervous Aussie dollar bears. This past session, the manufacturing activity report for April reported its steepest pace of contraction for the sector since April 2009; yet neither the currency nor yields seemed particularly hurt.

Gold at Risk of Breakout as Congestion Solidifies, FOMC Approaches
For the past two weeks, gold has charged higher on one of the most consistent bulls moves in many months. Yet, that strength pales in comparison to the record-breaking drop that preceded it in the crash below $1,500. As such, we recognize the climb as a mere retracement rather than an outright bullish performance on the commodity’s part. We are back at levels where further progress counts for much more in a trend rather than just a retracement. Gold bugs will look to the FOMC to see if the next drive can revive the multi-year bull trend.

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

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

1:00

CNY

Manufacturing PMI

50.7

50.9

Rebounded from its 8M low in March.

1:30

JPY

Labor Cash Earnings (YoY)

-1.20%

-0.80%

Subdued demand for Japanese cars has restrained auto sales, which is negative to unemployment and labor earnings.

5:00

JPY

Vehicle Sales (YoY)

-15.60%

6:00

GBP

Nationwide House Prices s.a. (MoM)

0.30%

0.00%

Although UK dodged a triple dip recession, the call for further easing has not abated; Weak economic growth is matched by little changed house prices

6:00

GBP

Nationwide House Prices n.s.a. (YoY)

1.30%

0.80%

6:30

AUD

RBA Commodity Price Index

87.9

Rising price of iron ore, base metals and coking coal led to a MoM increase but YoY figure continued to post a decline.

6:30

AUD

RBA Commodity Index SDR (YoY)

-7.50%

8:30

GBP

Purchasing Manager Index Manufacturing

48.5

48.3

Slipped into contraction territory for 2M.

11:00

USD

MBA Mortgage Applications

0.20%

The impact of sequestration budget cuts appeared to have insignificant effect on personal consumption; Market will look for confirmation from employment change that indicates employers’ confidence; Construction is the leading sector along the recovery, changes in spending could indicate sustainability.

12:15

USD

ADP Employment Change

153K

158K

12:58

USD

Markit US PMI Final