Talking Points:

Dollar: Will Traders Translate Heavy Data into Volatility?
Euro Jumps to Start the Week After EU Vote
Yen Crosses Trailing Equities In Uneven Risk Bid

Dollar: Will Traders Translate Heavy Data into Volatility?

A curb on liquidity has hurt the greenback as the market has taken the opportunity of holiday trading conditions to bid risk assets and to ease up on the long-dollar positions built up over the past few weeks. Of particular consternation to bulls Monday was the strong performance from the Euro – its primary counterpart. Yet, despite the follow through into early Tuesday trade, this pair has quite a ways to go before it definitively reverses the trend instigated earlier this month. Traders will be keeping close taps on risk trends with the return of liquidity weighing conviction following Friday’s record high close and on the coattails of a remarkable open for European capital markets Monday. In the upcoming session’s data, interest rate expectations will be of greater concern…and there is a lot of data.

Euro Jumps to Start the Week After EU Vote

European markets were surprisingly active Monday. Despite the absence of London and New York traders, the capital markets charged forward following fresh comments by ECB President Draghi suggesting policy accommodation was on the way and results that showed Euro-supportive politicians are still in control of the EU parliament (though a reported 31 percent of the region’s vote went to so-called fringe parties). From Draghi, remarked that the central bank is not resigned to allowing a ‘too low for too long’ inflation situation. Gauging the capital markets, the MSCI Europe Index surged 0.6 percent to its highest level since January 2008 – with noteworthy contributions by the DAX’s 1.3 percent swell and Italian FTSE MIB’s colossal 3.6 percent surge. Will the capital inflow thwart the implicit effort to ease the Euro back?

Yen Crosses Trailing Equities In Uneven Risk Bid

While most ‘risk’ sensitive asset classes were carrying a positive sentiment lean through Monday’s quiet session, the yen crosses were notable laggards. The extent of the pair’s gains was a tepid 0.1 percent advance for EURJPY, and three other crosses were actually red on the day. This performance does not bode well for the medium-to-long-term bulls in the market. A risk support for carry is founded on circumspect ground, so there is still a dependency on the BoJ’s presence in the market to revive this floundered run. From the BoJ minutes released Monday, it was reported that member Sato was outvoted for adding that risks to not reaching the inflation target was tilted to the downside with the majority optimistic on prices and growth. Without a stimulus upgrade, Yen crosses are likely to drop…which then would instigate the BoJ to act.

British Pound Will Look to Pick Back Up Rate Run, Carney On Tap

Like its US counterpart the United Kingdom’s capital markets were offline Monday for holiday – the Late May holiday. In turn, this non-risk sensitive currency was steadily moored to recent ranges with a variance of gains or losses of less than 0.1 percent versus its major counterparts. As liquidity fills out and the speculative drive is rekindled, the market will once again focus on rate forecasts for the pound. Last week, Gilt yields rose (2 year climbing 2.3 percent to 0.694 and 10-year advancing 2.8 percent to 2.635) while the 1-year-2-year forward swap advanced 1.6 percent. Despite these gains, rate speculation is still well off its cycle high. In the upcoming session, data is limited to the overheating housing market via the April BBA loans figures; but a speech from BoE Governor Carney will likely generate more discussion.

Chinese Yuan: A Retreat in Volatility Reassuring or Concerning?

Last week, the financial health of the Chinese markets improved measurably – short-duration repurchasing rates and swap rates slid – as Premier Li suggested pressures on the economy may necessitate a response and the PBoC filled out its scheduled of liquidity auctions. In turn, the Shanghai Composite picked up on the optimism with a Monday start of a 0.3 percent advance to 2,041 – adding to the iShares China Large Cap ETF two week run through Friday. For the currency, however, the chicken-and-egg situation with exchange rate responding to policy or vice versa doesn’t seem to be in full effect. The USDCNH exchange rate is little changed yet again with volatility levels at 3-month lows.

Emerging Markets Surprisingly Weak on a Quiet, ‘Risk On’ Session

While other risk benchmarks were drifting higher through the quiet Monday session, the Emerging Markets group seemed to struggle. The MSCI Emerging Market Index fell modestly through the trading day – though still very close to the seven-month high the measure won last week. A similar caveat performance was noted in the EM sovereign debt market following the record high the Bloomberg index of the asset grouping set this past Friday. On the FX front, the majority of the currencies lost ground against the US Dollar. Of note, the Ukranian Hryvnia was little changed after a weekend election that announced Petro Poroshenko had had won the presidency. His vow to secure the eastern regions of the country from separatists is leaving some uneasy. The Russian Ruble eased a mild 0.1 percent on the day. The biggest movers in the EM group were the South African Rand (down 0.6 percent) and Indian Rupee (0.4 percent lower). Ahead, 1Q South Africa GDP is top event risk.

Gold Trading Range Tightens but Weekly Volume Building

Virtually all measures of activity behind gold reflect a market that is settling – or coiling. The CBOE Gold Volatility Index is holding near 14 vols – the lowest levels in 13 months and the average daily true range (ATR) for the past month has plunged to its lowest level since October 2010. Alone, this information doesn’t tell us whether this is a trend of naturally deflating activity or a breakout scenario in the making. However, another element is presenting gold with a unique situation compared to it capital market counterparts. Where equities are seeing new progress on diminished volume, this commodity is seeing the opposite. Weekly volume levels behind gold futures have risen for the past five weeks. This is a much more prominent breakout threat.**Bring the economic calendar to your charts with the DailyFX News App.

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