Talking Points:

Dollar Positioned Above Critical Support
Euro Wins Break Versus Dollar, Appetite More Speculative
British Pound Scales Highest Level Since 2008

Dollar Positioned Above Critical Support

There were a few high profile technical breaks against the US Dollar through the opening trading session of the week. Both EURUSD and GBPUSD broke recent resistance in a drive that contradicted the overbearing expectation for a liquidity drain as the week wears into the US Independence Day market holiday. This technical event was enough to gain traders’ attention, but it isn’t likely enough to instigate a self-generating trend against the underlying current of participation. On a chart, that is well reflected in the Dow Jones FXCM Dollar Index (ticker = USDollar) moving up to 16-month support – not yet a break. Practically speaking, any attempts to move to the next stage of a more dynamic trend will find shallow market depth short circuits breakouts and volatility events before they catch.

From a fundamental perspective, the greenback’s stumble this past session is likely a mixture of a few elements. A contrast to strong European currencies is one aspect of the performance. Economic data on the calendar carried relatively weight, so there were few sparks from that traditional route. One relationship that stands out prominently is the USDollar’s correlation to market activity and uncertainty. Looking at the FX market’s short-term (one-week) implied volatility measure, there were notable declines in the indicator that came at exactly the same time as the currency’s own tumble. As a safe haven currency, the long collapse in this activity and fear measure has been a serious anchor to performance. The other facet to its larger performance is interest rate potential. On that front, San Francisco Fed President Williams reiterated his dovish stance, but Treasury yields and Fed Funds futures were little changed on the day.

As we find ourselves distracted by the volatility generated from a combination of top-tier event risk and thinning liquidity this week, it is worth it to take a moment to appreciate two reports with bigger picture and longer-term implications released over the past 48 hours. One was the IMF’s COFER report which breaks down central banks’ reserve holdings for the previous quarter. According to the reading, known (‘allocated’) holdings of US dollars dropped 0.8 percent worldwide, but rose 1.7 percent amongst advanced economies. This 1Q data point included, there is still a larger trend of diversification away from the dollar over the past 15 years. The other interesting report was the BIS’s annual assessment. This ‘central bank for central banks’ issued the clearest warning so far that stimulus and complacency are building risk.

Euro Wins Break Versus Dollar, Appetite More Speculative

While the Euro gained versus most major counterparts to start the week, it was the EURUSD’s charge through 1.3650 to six-week highs that carried the currency’s bullish banner. Follow through, however, was modest despite the move from congestion. This is a fundamental restraint. Among the event risk on the Euro-area this past session, top event risk was a modest uptick in the June CPI reading (still too early to sway the ECB) and an update to lending figures for May (which showed an extension of the disturbing drop in private loans). Ahead, the German and Eurozone employment data may shape ECB expectations, but is likely to change little beyond short-term volatility.

British Pound Scales Highest Level Since 2008

Sterling was one of the best performing majors on the day this past session. The highest profile move for the currency was the GBPUSD’s push above 1.7100 – a level the pair hasn’t seen since October 2008. That said, despite its historical bearing, this move didn’t come with particularly strong impetus for momentum. On the event side, the May mortgage approvals cooled. Far more influential, interest rates on Gilts and Swaps did edge higher – though they weren’t setting equivalent highs. Ahead, the UK manufacturing PMI and BOE FPC meeting minutes are up.

Australian Dollar Can’t Leverage Weak USD Ahead of RBA

Interest rate / monetary policy expectations are a key driver for the FX market. Yet, where the Pound was throttled by an uptick on rate forecasts, the Australian dollar was notably incapable Monday of follow on the same theme with AUDUSD stuck in its range as the dollar itself slipped on the day. In part, this was in deference to the RBA rate decision ahead. The markets need to see a rate hike on the horizon to keep it running.

Chinese Yuan: BIS Warning Louder than Short-Term PMI Data

There was plenty of remarkable insights on the global financial system delivered by the BIS’s annual report, but one of the more interesting warnings came on behalf of China. In a general warning on credit-derived and –dependent growth, China’s private sector-to-GDP ratio growing 23.6 percent above its long-term average was a clear warning. It certainly takes the fire out of the modest uptick in this morning’s PMI.

Emerging Market: IMF Report Shows EM Central Banks Shed Safe Currency Holdings

Emerging Market currencies were a mixed bag Monday, but there was a notable weakness among the grouping’s most liquid pairs – both the Brazilian Real and Russian Ruble suffered abrupt declines versus the dollar. Outside domestic calendar updates and quiet risk conditions, the IMF’s COFER report showed reserve holdings of the world’s most liquid reserve currencies dropped 3.8 percent through 1Q.

Gold Jumps to Two-Month High with Heavy Volume on Quarterly Roll

The 0.9 percent rally from gold drew gold bulls’ interest. A break to two-month highs with remarkable ETF and futures volume on an otherwise quiet day for bigger risk trends certainly stands out. Here too though, conviction is questionable. It is likely the transition from Q1 to Q2 for portfolio managers and the BIS’s warning about financial stability weighed in here. However, neither carries immediate follow through risk.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

1:00

CNY

PMI Manufacturing (JUN)

51.0

50.8

Expected to hit a 6-month high – a reading above 50.0 denotes growth

1:30

JPY

Labor Cash Earnings (YoY) (MAY)

0.8%

0.9%

Earnings growth is just as important as factory activity as it presents a ‘livable’ inflation increase