Dollar Suffers Repeat of Worst Week in 17 Months Ahead of Fed
Japanese Yen: Officials Hope for Calm after FOMC Rate Decision
Euro Event Risk Looks to Update Growth, Bailout Effort, Cohesion
Australian Dollar’s First Weekly Advance in 6 Weeks Hard to Extend
New Zealand Dollar Loaded with Volatility-Stirring Event Risk
Swiss Franc: Government Vote on Tax Evasion Far More Effective than SNB
Gold Will Break Either $1,420 or $1,375 This Week

Dollar Suffers Repeat of Worst Week in 17 Months Ahead of Fed
The Dow Jones FXCM Dollar Index (ticker = USDollar) dropped 1.3 percent for the second week in a row. The matching declines are the worst for the greenback since last January and the four-week tumble is the longest run of pain since September. This benchmark currency is at serious risk of seeing its impressive – counter risk – bull trend fully reversing course. However, Wednesday’s FOMC rate decision will be the judge of this possible misfortune. Much of the greenback’s more recent gains – particularly the May rally – was founded on premature ‘Taper’ speculation. The possibility that the Fed could throttle back on addictive stimulus threatened to undermine the unprecedented risk appetite drive and thereby leverage the greenback’s safe haven status. Yet, investors seemed to recognize that they got ahead of themselves with the June slump reflecting the Fed’s loose consensus to wait a few months to act. That said, speculators may not be reassured if they simply avoid a cut to the QE3 pace this month. A clear warning of an impending Taper within the next few months could just as effectively spark an implosion.

Japanese Yen: Officials Hope for Calm after FOMC Rate Decision
There are a lot of moving parts in assessing the health of the Japanese yen, but the most direct nerve to the region’s health is volatility. Measures of expected volatility (fear) for the Nikkei225 and USDJPY are themost buoyant since 2008. Japanese Government Bond (JGB) yields have settled somewhat, but they too have kept the capital markets on edge. Why is this a problem? While the stated goal of the Japanese central bank and government is to end a multi-decade battle against deflation, they are also looking to maintain stability in their markets in order to avoid crisis and promote growth. Should that endeavor fail, they could inadvertently create a disaster themselves. In an unusual mix, fear could lead to an unwinding of the carry trade that drives the yen higher (sabotaging one of their key goals); batter the nation’s ‘riskier’ assets like equities to undermine the nation’s perceived wealth; and force pension to sell JGBs and thereby drive yields higher. Japan is walking a fine line and global market stability is desperately needed. If the Fed can’t calm fears, it could indirectly feed Japan’s troubles.

Euro Event Risk Looks to Update Growth, Bailout Effort, Cohesion
While the EURUSD’s impressive, four-week rally through this past week – the longest series in nine months – seems to have captured the market’s interest, the euro’s health is certainly not best defined by this particular pairing. The currency’s performance against its other benchmark counterparts was mixed. That is an appropriate performance when we consider the fading economic outlook, political backlash in Greece, persistent doubts over bailout efforts and rising sovereign bond yields. In the week ahead, we will cover all the important aspects of the euro’s health. On the economic front, there are the June PMI figures– a timely measure of growth. For the financial and fiscal balance of the region, Eurozone ministers will meet at a summit in the second half of the week. What may ultimately prove most important though is the Fed decision. If the US can’t keep the peace, it could force the ECB to step up its game.

Australian Dollar’s First Weekly Advance in 6 Weeks Hard to ExtendAUDUSD advanced a modest 0.8 percent this past week. Yet, considering this was the first positive close in six trading weeks, it was a particularly important move. In the past two months, the Australian dollar has dropped between 11 and 16 percent against its major counterparts – a notable exception is made to the carry neutral AUDNZD, thought it still fell 2 percent. This considerable, bearish move was both more intense and began before the current slump in risk trends measured by benchmarks like the S&P 500. Certainly the carry trade impact to risk aversion and RBA policy of easing has hurt the Aussie. However, there is another aspect adding to the pain: repatriation of capital seeking to diversify based upon its newly printed reserve status. We see this in poor bond auctions and capital flow measures.

New Zealand Dollar Loaded with Volatility-Stirring Event Risk
While the New Zealand dollar will certainly be caught up in the enforced calm before and heavy current after the Fed rate decision via risk trends, the currency will see event risk of its own to heat up pairs like AUDNZD and EURNZD. From the docket, we have a wide view of the economy through a wide range of data. Consumer confidence and trade for the second quarter are two big indicators due in the first half of the week. The current account balance will be particularly important as trade in physical goods is key to growth while capital inflow for investment purposes is the currency’s true claim to fame amongst the majors. Top event risk, however, goes to the 1Q GDP read. Due after the Fed decision, this indicator will be most productive if it falls in line with the prevailing risk trend.

Swiss Franc: Government Vote on Tax Evasion Far More Effective than SNB
Through much of 2012, the Swiss National Bank was struggling to keep their currency from choking off growth. They were certainly successful in keeping a 1.2000-floor beneath EURCHF, but a barrier didn’t encourage the franc to actually depreciate further. Fast forward 9 months since we have come off that hard floor, and the pair is still trading within 500 pips of the mandated level. The disconnect is that the SNB policy didn’t ‘solve’ the actual market forces that kept the franc buoyant. Speculative forces weren’t in control, rather those fleeing risk for safety – especially in Europe – were seeking harbor for their capital in the Swiss banking system. To that effect, the upcoming SNB decision will likely result in no change to the 1.2000 barrier. Yet if EURCHF is to return to 1.3000, the government’s vote (the lower house votes this week) to allow banks to release tax information to the US without violating local law can set a serious precedent: ‘seek safety elsewhere’.

Gold Will Break Either $1,420 or $1,375 This Week
Though we have experienced a disconcerting retreat from equities and a normally, catalyzing 3.8 percent drop from the US dollar; gold has refused to commit to a meaningful trend. That reticence will likely be overwhelmed in the coming week, however, as the Fed weighs in on monetary policy. Looking back over the past five years, we have seen the precious metal charge higher alongside the central bank’s balance sheet. Stimulus is both a reflection of financial instability and meaningful deflator of the value of currencies. Yet, there has been a distinct and severe divergence between the two in 2013. The swell in gold volatility through April was a first blow. The second may be actual confirmation that stimulus efforts will start to level off. COT figures show net speculationfutures long interest is at a six-year low. Now investors…

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

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