Talking Points:

Dollar Rally as Much a Bull Trend as S&P 500 Retreat a Collapse
British Pound: So Much for BoE Clarity
Yen Crosses Facing Inevitable Technical Breaks

Dollar Rally as Much a Bull Trend as S&P 500 Retreat a Collapse

A bullish jump for the Dow Jones FXCM Dollar Index (ticker = USDollar) reflected notable gains for the greenback among pairs like AUDUSD, GBPUSD and NZDUSD. The gains measured in these majors, however, is rather modest in the bigger picture. Furthermore, these standout performers made moves from their respective and relative highs (dollar lows). In other words, this is not a convincing signal for a more prolific trend development. This mirrors the conditions in the US equity markets –a good proxy for investor sentiment, which caters to another fundamental aspect of the currency’s value. Having grown catatonic between slow daily advances and a steadily deflating volatility backdrop, the 0.6 percent drop from the S&P 500 and 10 percent jump in the VIX volatility index (the biggest in more than two months) seems incredible. Yet, it is important to remember the benchmark stock index is pulling back from a record high and the ‘fear’ index is climbing from a seven-year low. This may prove yet another hiccup in a larger trend unless conviction marks a more sizable shift.

As market participants, it is important to never write off a scenario. And, the impact of an inevitable sentiment shift that will be exaggerated by the mixture of complacency and leverage that has solidified alongside record highs means it is an outcome we should have a plan ready to go for. That said, such a seismic shift to the financial system (sentiment influences all assets and markets) will take time and distance to confirm. In the meantime, we can focus on other active fundamental considerations for the dollar. Interest rate considerations are still an active secondary mover.

This past session, material improvements in the June Conference Board consumer sentiment survey and New Home Sales figures for May add economic tangibility to the still-vague timing of the Fed’s first hike and subsequent pace. This morning, we find the 2-year Treasury yield trading at a 9-month high 0.492 percent. Earlier, an auction of $30 billion of debt with the same duration drew its highest yield since May 2011. This is strong evidence that the speculation for the hawkish regime change is filtering in. No doubt, Philly Fed President Plosser’s suggestion that rate hikes could come as early as next quarter contributed. Ahead, watch the economic docket and auction of a floating rate 2-year note.

British Pound: So Much for BoE Clarity

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

Yen Crosses Facing Inevitable Technical Breaks

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?

Euro Weighed by Market Rates but Periphery Appetite Key

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 Under Pressure as 10-Year Yield Gaps Lower

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: Most Currencies Weak, Ruble Soars

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: Will Central Bank Plans to Cut Debt Holdings Lift the Metal?

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. **Bring the economic calendar to your charts with the DailyFX News App.

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