Talking Points:

Dollar Suffers Another Bout of Selling Led by AUDUSD
British Pound Extends Run Despite BoE Warning
Euro Generating Limited Gains on Strong Periphery Bond Demand

Dollar Suffers Another Bout of Selling Led by AUDUSD

The Dow Jones FXCM Dollar Index (ticker = USDollar) has slid for the fifth consecutive trading day. That matches its worst run in 11 months. Another, meaningful decline would likely drive the benchmark currency through 16-month support and in turn mark a technical shift in the speculative winds. Yet, in the lead up to major event risk (Thursday’s NFPs) and immediate drain of liquidity thereafter (the Independence Day market holiday), this is anything but a clear picture of what the currency is capable of doing through the immediate future. Amongst the majors shaping the dollar’s performance, EURUSD’s breakout Monday lost traction, GBPUSD continued to fresh 6-year highs at a controlled pace and AUDUSD lead the anti-dollar move with a 0.7 percent jump that pushed the pair to 8-month highs.

Given the distribution of the greenback’s performance against its counterparts, neither interest rate speculation nor a strong risk bid seem to be taking the yoke. It is true that the US equities scaled record highs, but that is likely more a function of the status quo rather than a buoyant view for further capital gains. Volatility measures offer good scale on this front. The equities-based VIX slipped 4 percent back to 11.2 percent – very close to its natural low. Meanwhile, the FX-based equivalent nudged slightly to a fresh record low. An effort to take advantage of small oscillations in risk premium is a short-term speculator’s approach and not the foundation for a new and lasting trend in sentiment. Given the steady drain of liquidity (participation) into the extended US holiday weekend, the scope for a serious trend in ‘risk trends’ is thin.

Perhaps more capable of generating heat for the dollar are rate expectations. This past session, Treasury yields and Fed Fund futures offered a modest uptick in US rate forecasts – contradicting the currency’s performance. Event risk this past session did little to direct the hawkish lean – the ISM manufacturing survey unexpectedly softened and an Economic Optimism survey from IBD dropped – but the upcoming listings will certainly peak the market’s interest. The ADP Employment report for June will stoke speculation for Thursday’s Fed-favorite NFPs release (which we will cover live). Furthermore, we have Fed Chair Janet Yellen on tap scheduled to speak at the IMF.

British Pound Extends Run Despite BoE Warning

According to the Bank of England, the market is currently underestimating the possibility of “tail risks”. This is essence the same warning that the Bank of International Settlements gave over the weekend and a growing number of officials and regulators have voiced over the past weeks: financial markets are complacent and that could lead to risky market conditions in not-to-distant future. Meanwhile, pound traders were keeping track of rate speculation. An accelerated rally for short-term (2-year) UK sovereign yields is moving the benchmark back towards its three-year highs. The seven-month high from Markit’s manufacturing PMI survey certainly lent a helping hand in this move. Ahead is an update on the economic sector deemed the UK’s most prominent risk: housing. Home inflation and construction activity readings are due.

Euro Generating Limited Gains on Strong Periphery Bond Demand

One of the key underlying fundamental appeals of the Euro is the inflow of speculative capital looking for a undervalued assets in the aftermath of the Eurozone crisis and the higher yields that came hand-in-hand with the period – though the marginal return on this theme is drawing closer scrutiny. This past session, we saw more of that speculative demand. Yields for periphery Eurozone sovereign bonds were being pulled further down – a reflection of demand – with particularly remarkable moves from Spanish and Irish fixed income. Yet, perhaps showing some level of fatigue behind this investment idea, the Euro was lower against all but the Japanese yen this past session.

Australian Dollar Rallies Despite Reserved Status Quo from RBA

For all intents and purposes, the RBA’s monetary policy meeting ended with a ‘status quo’ stance. That means a hold on the benchmark rate and no speculative fodder to shape expectations of the first hike in the foreseeable future. Nevertheless, Aussie government bond yields edge higher and the currency did the same. Yet with key crosses like AUDUSD so close to resistance, that nudge turned into a break.

US Oil: Strong Growth Forecast or Strong Risk Appetite?

Is the US equity drive to record highs a reflection of economic and financial confidence? Or is it merely the distortion of a market backdrop that leverages the demand for risky assets? US oil is a piece that helps to solve this puzzle. Despite the bid under stocks, the commodity – considered the fuel of growth – was unchanged on the day. Given supply concerns (Iraq), we should expect the demand trigger to be sensitive.

Emerging Market ETF Finds Biggest Rally in 2 Weeks, Currencies Don’t Fare as Well

A global capital market bid would not leave the MSCI Emerging Market ETF without a speculative appeal. The measure jumped 1.0 percent – though the trend of deflating volume continues. Looking at the FX list though, we see a different picture. Most currencies were little changed. Yet, the Brazilian Real put in for a hefty 0.9 percent rally while the Russian Ruble booked a 1.0 percent tumble.

Gold Speculators’ Volume Carries Over But Not Trend

The swell in volume that came with Monday’s quarter-end jump seemed to stick around through Tuesday. Though short of the spike the previous session, derivative turnover was certainly elevated from the recent average. Ahead, gold bugs will be watching Yellen and the US ADP payrolls figures to gauge the outlook for US monetary policy and currency-alternative demand.**Bring the economic calendar to your charts with the DailyFX News App.

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