Talking Points:

Dollar Rebounds Before Bear Trend Solidifies and NFPs Hit
Euro: How Would a Hold on Policy Impact the Market?
British Pound Yield Advantage Versus Dollar Highest in 3 Years

Dollar Rebounds Before Bear Trend Solidifies and NFPs Hit

A last minute bounce for the US dollar has balanced the market before the ever-important nonfarm payrolls (NFPs) release. If the Dow Jones FXCM Dollar Index (ticker = USDollar) had stumbled through another session, it would have confirmed the worst series of losses for the benchmark in 11 months and likely tipped the scales on a 16-month congestion pattern. Breaking such prominent support would materially alter both the trend and presumptions of activity level – a direct contrast to the general state of volatility we are currently facing. Developing a trend in a market that is systemically negating momentum and conviction is exceptionally difficult and thereby a low probability event. That said, while conditions may foil trends, it doesn’t preclude volatility.

For volatility, we have the convergence of a perfect drain on market activity. We have seen a steady decline in realized and forecasted activity measures for all asset classes. From the FX-based VIX, we are only one-day removed from a record low (5.53 percent). To further exacerbate the situation, the Independence Day market holiday for the US represents one of the most dependable seasonality effects in financial markets – a further withdrawal of liquidity and subsequent narrowing of trading range. This makes for an extraordinary situation. Already extremely low, this holiday could bring a trough in activity. Of course, if it is the ‘extreme’ low, that would suggest that a turn may be at hand. Given July statistically sees the biggest increase in volatility measures of any other months, this may not be far off the mark.

With the market environment in mind, we will better be prepared for what to expect from the June labor data. Volatility from ‘surprise’ outcomes (deviations from consensus) can generate a volatility response, but it is unlikely to instigate a strong drive…at least until next week. The NFPs figure generally captures the market’s immediate attention, though the ‘qualitative’ measures – like the unemployment, participation and wage growth rate – have started to carry more influence since the Fed dropped its forward guidance targets. If there is a clear improvement in the broad range of data, it could stoke Fed rate hopes next week when market participants are back in full force.

Euro: How Would a Hold on Policy Impact the Market?

Just a month ago, the European Central Bank (ECB) announced a range of initiatives aimed at supporting economic activity, curbing disinflation and revive private lending. Initially, the Euro sunk as the central bank lowered its benchmark rates (including a negative deposit rate) and announced a target-LTRO. These directly reduce the yield and demand the currency offers. Yet, that initial tumble didn’t last. Why? Because we are competing against a very motivated market force: appetite for return. Appetite for higher rates has sent investors to depressed and high-yielding European assets. Stimulus helps to reduce the implied risk with these investments, but the premium will eventually fall below equilibrium. In this meeting, there is little need to move again so soon…unless they are adamant in their need to drive the euro lower.

British Pound Yield Advantage Versus Dollar Highest in 3 Years

Where most other dollar-based majors put in some degree of correction, GBPUSD muscled to yet another multi-year high. This strength falls squarely on the sterling’s shoulders. One of the best performing currencies this past session, a jump in the Markit construction survey and Natinowide housing price index for June offered another lift in rate speculation. Looking to 2-year UK government bond yields, a 0.93 percent reading is the highest level since June 2011 and also represents the biggest premium to its US counterpart in the same amount of time. The service sector and composite activity reports in the upcoming session will have a tall task to keep this perfection priced in.

Australian Dollar: RBA Governor Says Currency Too High, Dollar Undervalued

Effective central bank currency manipulation depends on how committed the market believes you are to driving the exchange rate. The RBA was very vocal this morning, but most of it is seen as bluster that will not lead to tangible action to forcibly alter the market. Governor Stevens this morning said the market underestimates an Aussie dollar drop and that the US dollar is undervalued. But will he do anything to realize that?

Chinese Yuan on Edge of Rally, Data Attempts to Catalyze Move

The Chinese government’s non-manufacturing activity report for June was offered a relatively flat reading – a modest ease from the previous month at 55.0 but well in growth territory. The HSBC service and composite readings for the same period blew the consensus out of the water. With USDCNH carving out a bearish reversal pattern, this update is well placed. Yet, even top tier indicators struggle to move the Renminbi.

Emerging Market Currencies Diverge Further from Capital Markets

Emerging Market capital asset benchmarks posted notable gains this past session. The MSCI Emerging Market ETF rose 0.3 percent on the day to bring it back up to range support. Yet, volume here was just as anemic as the advanced economy markets. Meanwhile, the more liquid EM currencies were weakening. The Brazilian Real, South African Rand and Mexican Peso gave ground to the day’s dollar gains.

Gold Falls Back into Range as Jobs Report’s Impact on Dollar, Risk, Yields Comes Into Focus

Any hope that the strong hiccups of bullish interest from gold these past weeks would feed an underlying trend have all but vanished. The metal has fallen back into a quiet trading pattern with tame volume and leveling open interest amongst derivatives. Perhaps US labor data today can revive interest. This round of event risk can move risk trends, inflation forecasts and dollar bearings – gold’s primary themes.**Bring the economic calendar to your charts with the DailyFX News App.

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