Dollar Rebound Lacks Strength, Dow Showing Extreme Breakout Risk
Euro: Will Spain 2Q GDP Leverage Volatility Ahead of ECB Decision?
British Pound Adrift as Market Awaits BoE Decision
Japanese Yen Crosses Following Nikkei 225 Plummet
Australian Dollar to Weigh in on RBA Governor Steven’s Remarks
Swiss Franc Traders Await SNB’s Quarterly Currency Holdings Report
Gold Working its Way into Another ‘Breakout’ Position

Dollar Rebound Lacks Strength, Dow Showing Extreme Breakout Risk
The Dow Jones FXCM Dollar Index (ticker = USDollar) posted its first advance in three trading sessions Monday, but we shouldn’t be on the lookout for a EURUSD reversal just yet. While the greenback managed to win a rebound against most of its major counterparts through the opening session of this trading week, the commitment behind the move was non-existent. That doesn’t come as much surprise as there is heavy event risk less than 48 hours out and the general ebb and flow of risk trends is just as sensitive to the upcoming headline items as the currency is. The combination of the advanced reading of 2Q US GDP and the Federal Reserve rate decision on Wednesday has set investors’ focus. The likelihood that investors would take major positions ahead of such a substantial gust of fundamental wind is extremely low. That said, the probability of volatility following the updates is extraordinarily high. We can see the traditional signs of anxiety in the markets. The Dow Jones Industrial Average is showing its lowest level of actual price action (five-day standard deviation) in 20 months while volume is at five-month lows. Expect Taper speculation to be stirred by the upcoming consumer sentiment and housing data, but commitment likely comes later.

Euro: Will Spain 2Q GDP Leverage Volatility Ahead of ECB Decision?
Top event risk for the euro through the opening 24 hours of this trading week was the news that the International Monetary Fund (IMF) approved its fourth review of Greece’s austerity implementation. Satisfied with the progress made – and the contentious 22 requirements the country struggled to pass through this past week – the fund approved the disbursement of another €1.7 billion in aid. There wasn’t much of a relief rally to be found in Greek 10-year sovereign bonds, much less the euro itself. We are likely to find greater motivation out of the event risk ahead. Due at 7:00 GMT, the first reading of 2Q Spanish GDP is projected to print the eighth consecutive, quarterly contraction while the year-over-year recession reading is expected to show little improvement with a 1.8 percent slump. This is the first major European growth update.

British Pound Adrift as Market Awaits BoE Decision
The sterling rose against its high-yield counterparts Monday but slid against the US dollar, Japanese Yen and Euro. What are we to take away from this performance? This is a sign that currency is caught in the broader market current and no generating momentum of its own. That could very well end later in the week when the Bank of England (BoE) meets with a meaningful shift in policy guidance – an actual change in policy may be expecting too much. Yet, in the meantime, the FX market will bide its time as the pound struggles to offset crosswinds. Meanwhile, net consumer credit and mortgage approvals cooled while the CBI’s retail sales survey jumped. Up late tomorrow: GfK consumer confidence.

Japanese Yen Crosses Following Nikkei 225 PlummetThere are two considerations that drove the Japanese yen to losses of 25 to 35 percent in the nine months through June: the Bank of Japan’s (BoJ) incredible escalation of monetary stimulus and the global market’s scramble for yield. While the central bank’s ¥60-70 trillion per year stimulus target is extraordinary, the pace of acceleration has leveled off. Now, we are testing the ‘buy the rumor, sell the news’ turn of phrase that is so often used in fundamental trading. Stimulus will keep pressure on the yen, but there is a more pressing factor in play for the yen crosses now: carry trade. The yield differential on the crosses is near recent historical lows, but the yen crosses are still exceptionally high. There has been some retreat measured in the highest carry pairs like AUDJPY and NZDJPY; but the whole segment is exposed. Should risk aversion deepen, FX traders will notice the yield glut from holding these unattractive carry trades. FX traders should watch the Nikkei 225. The index has dropped over 7 percent in the three daysand its 20-day correlation to the USDJPY is 0.6 (remarkably high).

Australian Dollar to Weigh in on RBA Governor Steven’s Remarks
Currently, overnight swaps are pricing in a 78 percent probability that the Reserve Bank of Australia (RBA) will slash the benchmark lending rate for the country another 25bps to 2.50 percent. That is the most ‘dovish’ the market has been on its Aussie policy outlook since last October (Take our Trading IQ Quiz to gauge your market knowledge). This is particularly dire for a currency whose primary appeal in the FX market is as an investment (carry) currency. And, it certainly doesn’t help that risk trends themselves – measured by carry trade – continue to suffer as well. There is a heavy, front-ended expectation for a rate cut on August 6, but the 12-month forecast is still relatively restrained. At some point, the near-term cut risks will be priced in and the Aussie’s aggressive drop (leveraged beyond traditional risk) will cool. The upcoming speech by RBA Governor Stevens on economic health will be picked over to assess whether a time frame for this shift will occur.

Swiss Franc Traders Await SNB’s Quarterly Currency Holdings Report
The market’s interest in the Swiss National Bank’s (SNB) buying habits has faded since EURCHF lifted itself off the 1.2000-floor the central bank imposed on the exchange rate nearly two years ago. However, the SNB’s holdings can reflect tentative changes in monetary policy that the policy officials wouldn’t speak about otherwise. In the upcoming session, the central bank will release its second quarter currency holdings. Their exceptional holdings of foreign currency likely held near record highs. While they could have booked a tidy gain on some of their exposure, it is unlikely that they would want to give investors a reason to unwind exposure under the assumption that the pair’s largest backer is packing it in. That said, the central bank’s presence may simply be a rudder at this point. Thrust for diverting capital away from the Swiss financial system is more significant via the government’s ongoing debate over releasing US nationals’ tax records to foreign governments.

Gold Working its Way into Another ‘Breakout’ Position
There was a tepid bid for gold through the morning hours of the New York trading session, but it didn’t hold through the end of the day. Technically speaking, the precious metal has closed in the red for consecutive trading days. However, it isn’t the market’s direction that is so remarkable, rather its activity level. Though the CBOE’s Gold Volatility Index (a measure of expected volatility three-months down the line) is still nearly double what it was at the beginning of April at 22.8 percent, actual price action has grown dangerously quiet. A good proxy for price action levels, the 5-day (1 trading week) average daily range for the precious metal reflects congestion that technical traders can see in a ‘wedge formation’. Add to that the fact that volume on the SPDR gold ETF – the most liquid proxy – hit a 12-month low, it becomes clear the market’s are awaiting something. There are few doubts as to what that something is: the Fed decision can make or break gold’s alternative value.

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

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

1:30

AUD

Building Approvals (MoM) (JUN)

2.0%

-1.1%

After disappointing prior prints, these readings may provide hints as to the impact of a slowing China on Australia.

1:30

AUD

Building Approvals (YoY) (JUN)

0.0%

-3.2%

4:00

JPY

Vehicle Production (YoY) (JUN)

-6.2%

Japanese automakers are reporting massive improvements in profit due to a weaker Yen, but global competition has left vehicle production contracting since last summer.

5:00

JPY

Small Business Confidence (JUL)

49.6