Talking Points:

Dollar Gains Checked by Rebound in Risk Collapse in Volatility
Euro Traders Look to Data to Shape Stimulus Expectations
Japanese Yen Crosses Checked Higher Before USDJPY Gives Way

Dollar Gains Checked by Rebound in Risk Collapse in Volatility

A 0.1 percent retreat from the Dow Jones FXCM Dollar Index (ticker = USDollar) is mild considering the breadth of the ‘risk on’ sentiment this past session. Both speculative appetites and dollar selling are kept in check by conviction – or a lack thereof. Each time there is tentative evidence of the market’s faith building behind the next wave of capital inflow into the speculative / high-yield realm, we find the effort quickly curbed before momentum has a chance to catch traction. This has left the S&P 500 and US equity indexes to amble for fourth months, a divergence for global stock markets and a notably weaker condition for FX-based carry trade. Between a multi-year bull trend and the recent rise of doubt, we have found the trading ranks shift heavily towards the short-term speculator. Opportunists who are looking for short-term dips in price or jumps in volatility to exploit. The question is how long speculative appetites can subsist on these scraps.

As of late, the short-term swing traders’ ability to squeeze trades out of these brief adjustments has collapsed to anemic levels. The equity-based VIX implied (expected) volatility measure closed below 12 percent this past session. That has only happened two other times over the past 7 years. Dollar traders should keep a close eye on any abrupt changes in activity level moving forward as extremes rarely last. In the absence of a systemic ‘risk’ move though, rate speculation is still guiding price. The FOMC minutes were top risk this past session and PMI data ahead.

Euro Traders Look to Data to Shape Stimulus Expectations

A late rebound from EURUSD saved the pair from a possible upgrade to the pair’s nascent bear trend. Dropping down to test the pair’s 200-day moving average (we’ve held above it for 8 months running), a hawkish ECB member offered up commentary that conflicted with the steady flow of stimulus rumination we have heard from the group over the past few months. Bundesbank President Jens Weidmann remarked that no decisions for the June ECB meeting were already expected, that deflation was not a perceivable risk and that an outright QE program was unlikely. While that doesn’t move us off the path of more accommodation in two weeks, it does keep the market off balance and certitude. Also in the news, a Bundesbank member joined the open concern among central bankers over the risk of extreme low volatility conditions.

Japanese Yen Crosses Checked Higher Before USDJPY Gives Way

As expected, the Bank of Japan held its bearings on monetary policy. This the market has prepared for. What is not fully priced in for the Yen and Japanese capital markets is the particular chances of greater monetary accommodation moving forward. From the statement that accompanied the policy decision and BoJ Governor Kuroda’s press conference, the sentiment was optimism and an expectation for current policy to lead the economy to recovery and inflation to its 2 percent target without additional measures. Keeping the option open in not a strong Yen cross buoy. However, a possible focus on exchange rates may still feed hope of a QE upgrade if the Yen crosses correct.

British Pound Climbs after BoE Minutes, Retail Sales Reinforce Rate Hike Calls

The modest beat from the UK consumer inflation reading Tuesday was met with limited optimism amongst Pound bulls. However, with a modest but tangible upgrade in tone from the BoE minutes and significant beat from the retail sales report; the currency started to move. Though this is hardly breakout velocity – and we likely do need that kind of conviction to push beyond 1.7000 on GBPUSD – the advance was material in low volatility conditions. We’ll see if the details of the 1Q GDP figure and CBI manufacturing activity report can further yields and the Sterling.

Australian Dollar, Chinese Yuan Climb Slowly After Strong PMI Reading

Wage inflation through 1Q in Australia hovered at extraordinarily low levels of growth and consumer confidence softened last month. That was what data from the docket offered the Aussie dollar. Nevertheless, the currency managed to edge higher. This morning’s substantial Chinese PMI manufacturing beat presents a far more convincing driver. AUD is up against all of its counterparts and the Chinese Offshore Renminbi (CNH) has found modest gains versus the US Dollar for a third straight day on the number – which is still in contractionary territory at 49.7.

Emerging Markets Take Part in Speculative Risk Bid

Emerging market currencies advanced broadly against the benchmark US dollar Wednesday as the MSCI Emerging Market ETF posted a 0.8 percent jump of its own to 42.92. Though a wide-ranging move, the conviction for the segment met the same limitations as the general risk sentiment. The ETF has struggled to advanced beyond a six-month high of 43, while the liquid currencies from the designation (Brazilian Real, Turkish Lira, South African Rand) have spent the past two weeks meandering. In the upcoming session, the employment statistics from Russia and Brazil may add volatility to the BRICS.

Gold’s Range Narrows to $20, Activity Reading Nears Multi-Year Lows

Activity levels behind gold trading continue to recede, leaving the market to deal with a diminishing range. The exponential average true range – emphasizing more recent price action – for the past trading month has dropped to lows that have defined the floor on volatility back to late 2010. That suggests the $20 band of market range the precious metal is currently tracking out will eventually break. However, just like risk trends in the financial markets, recognition of the exceptional conditions does not inherently mean they are obligated to revert. A rebound in global yields may help force the break if it draws with it inflation and/or interest rate speculation. Meanwhile, volume on the main SPDR Gold Shares ETF jumped while total ETF holdings dropped to a fresh four-and-a-half year low of 55.302 million ounces.**Bring the economic calendar to your charts with the DailyFX News App.

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