Dollar Rally Eases as US Stocks Take Another Spill after Fed Chatter
Euro: German Confidence Rises as Slovenian and Greek Yields Surge
Japanese Yen: Abe Wins Foothold in Tokyo Ahead of Next Month Elections
British Pound: Both Mervyn King and Mark Carney Set to Speak
Australian Dollar Rebounds Across the Board as Bonds Bounce
US Oil Posts Biggest Rally in Three Weeks
Gold Slips 1.1 Percent but $1,275 Extends the Bear Trend

Dollar Rally Eases as US Stocks Take Another Spill after Fed Chatter
The US dollar slipped for the first time in six trading days – breaking pace on a bull run that matched the strongest advance for the benchmark since September 2011. What makes this performance particularly surprising was the fact that US equities extended their losses through Monday’s session and two Fed policy officials weighed in with commentary that supported the central bank’s recent turn to a firmer hand on quantitative easing. From the S&P 500, an afternoon rally pulled the benchmark well off its lows. And yet, the benchmark still closed the day down 1.2 percent to a two month low. The market is now of 6.8 percent from its record high and the VIX volatility index suggests fear of a lasting correction is more ‘sticky’ now than it was during last November’s pullback. Adding to speculators’ efforts to time the ‘Taper’, Fed Hawk Richard Fisher said a “significant majority” backed Bernanke last week, while Kockerlakota said the yield rise was not yet “a concern”.

Euro: German Confidence Rises as Slovenian and Greek Yields Surge
While there plenty of headline space dedicated to what happens to the market as the Fed backs off of its QE3 pace, troubles brewing in the European markets seem to be drawing less interest from the financial media. On the newswires, we learned the German IFO business sentiment indicator improved with a 102.5 ‘expectations’ reading that bested expectations. This is yet another indicator that suggests the region’s largest economy is strengthening, which is certainly important to region-wide growth. Yet, the divergence between the Eurozone’s largest member and the periphery should be a risk that most euro traders recognize at this point. On that point, Slovenian dollar-based bond yields topped 7 percent for the first time. Meanwhile, Spain’s 10 year is up 13 percent in three days to 5.12 percent. Greece’s is up 1.12 points to 11.3 percent.

Japanese Yen: Abe Wins Foothold in Tokyo Ahead of Next Month Elections
Volatility in the Japanese markets is cooling…and that supports the Bank of Japan’s efforts to push its currency lower. In the FX market, expected USDJPY volatility one week forward is still high at 17.9 percent; but it is materially lower than the peak 25 percent high from June 13. As for capital markets, the Nikkei 225 has seen its three-month volatility measure settle more than 20 percent off its peak high at 37 percent and the Japanese Government Bond (JGB) ha maintained a four-week long range between 0.90 and 0.80 percent. Without volatility forcing investors to offset their exchange rate risk, the central bank’s steady devaluation effort of the yen can take over. Another fundamental support was Prime Minister Abe’s LDP win in Tokyo elections Sunday. This solidifies next month’s elections and implementation of the ‘three arrows’.

British Pound: Both Mervyn King and Mark Carney Set to SpeakGilt yields managed to hold on to more of their gains than their US counterparts Monday. The benchmark 10-year yield is now 18.5 percent higher (at 2.53 percent) in the span of three trading days – an 18-month high and unflattering position for a country trying to work down its debt position. Looking at the economic docket, we will have two notable pieces of event risk for sterling traders to keep an eye on. The Financial Stability Board meeting is a full gathering of G-20 finance ministers, central bankers and regulators to discuss global financial stability. This event carries meaning for most traders, but it should be particularly important for those watching the pound as incoming BoE Governor Mark Carney will preside. Meanwhile, his counterpart – outgoing Mervyn King – is set to testify on monetary policy with other MPC members.

Australian Dollar Rebounds Across the Board as Bonds Bounce
Though its performance was restrained, the Australian dollar still managed to advance against all of its major counterparts this past session. The economic docket in Australia was empty, which was more of a boon for the harassed currency. For the currency, the positive performance extends a period of congestion for the AUDUSD that the pair needs if it hopes to establish a foothold to a more meaningful reversal. Looking at the outlook for volatility on the pair (three-month implied volatility), the risk of heavy seas is still the highest we have seen in over a year. Under general ‘risk aversion’ conditions, that can put the carry-favored Aussie dollar under significant strain. Yet, there are bright spots. The Aussie 10-year bond yield slipped 13 bps after last week’s epic rally (the largest in over a decade) and the 12-month interest rate outlook shows the swaps market is just off its least dovish levels (9 basis points of expected easing) in 11 months.

US Oil Posts Biggest Rally in Three Weeks
Follow three days of selling – the most recent two of which were particularly heavy – US oil put in for a 1.6 percent advance the opening session of this trading week. That is the largest advance for the West Texas Intermediate (WTI) grade futures contract since June 3. Volume of approximately 675,000 contracts reflected activity that stands up to the heavy turnover in the second half of the past week. Meanwhile, the CBOE’s volatility index for the commodity has held below the 26 percent level for the third day running. This level of activity risks contributing to a breakout given the correct alignment behind meaningful event risk. In the upcoming US session, the API inventory figures for the week ending June 21 are due. After the 4.3 million drop last week and the massive 8.97 million barrel increase the week before that, we’ll look to see if inventories remain volatile. In the meantime, the Commitment of Traders (COT) numbers from the CFTC showed that speculative futures traders built up their largest net-long position – a net, 299,000 contracts – on record through last Tuesday.

Gold Slips 1.1 Percent but $1,275 Extends the Bear Trend
Following the heavy sell off post-FOMC last week, gold settled this past session. On a day-over-day basis, the metal’s performance certainly appeared weak. The 1.1 percent drop was substantial, but it wouldn’t progress the eight-month long bear trend. To extend this now-mature bearing, a concerted move below $1,275 would likely send another round of committed bulls to deleverage. Meanwhile, volume through Monday’s session matched the restraint of price action. Futures turnover was still above the two-week average, but sharply off the spike on Thursday and even the moderated pace from Friday. Meanwhile, the market is still digesting positioning data. With the COT report showing net long speculative positioning in gold futures at its lowest level since June 2005 and ETF holdings were just 56,000 ounces away from setting a new three year low (after a 20.3 percent plunge). This is drawing out many contrarians with claims over ‘over-extended’, but this has fundamental momentum behind it and shouldn’t be approached lightly.
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

23:50

JPY

Corporate Service Price (YoY) (MAY)

0.00%

-0.40%

Improvements in price indexes and confidence surveys will benefit the Yen and convince market participants that ‘Abenomics’ is actively working, in the short term at least.

5:00

JPY

Small Business Confidence (JUN)

48.2

6:45

EUR

French Own-Company Production Outlook (JUN)

-2

Data out of France, and especially Italy, will be watched this week following spikes in the bond yields of all European countries following ‘taper’ fears from FOMC, Bernanke. ECB President Mario Draghi comments later in the day.

6:45

EUR

French Production Outlook Indicator (JUN)

-43

-47

6:45

EUR

French Business Confidence Indicator (JUN)