Dollar At Risk Of Lasting Bear Trend If S&P 500 Doesn’t Capitulate

An effort by the US dollar to recover its footing ended miserably this past session – but the bears haven’t been allowed free rein over the benchmark currency just yet. For the Dow Jones FXCM Dollar Index (USDollar), the 0.7 percent slip Tuesday was third sharpest in 2013. It also so happens that the previous two larger stumbles came this past week. This speaks to an increasingly volatile market backdrop which can often open the door for a far more prolific trend development given the correct push. Yet, with the USDollar facing significant support between a multi-year range mid-point at 10,560 and 100-day moving average at 10,500; leveraging the bears’ drive is perhaps more difficult that current fundamentals permit. Weakness over the past few weeks owes much of its existence to the eased fear of the Fed ‘tapering’ its stimulus program next Wednesday at the June policy meeting. The influence of this tempered dollar driver has shown itself in the S&P 500’s ability to hold 1,600 support, but a weak 3-year Treasury auction shows that the shift is inevitable. Stimulus and risk threaten to set each other off.

Japanese Yen Wins Biggest Rally in 3 Years, USDJPY Eyes 95
The Japanese yen soared this past session in the aftermath of the Bank of Japan’s (BoJ) monetary policy announcement. USD/JPY tumbled 2.8 percent for the biggest drop in three years, EUR/JPY collapsed 3.1 percent (only tipping a three-month record) and AUD/JPY retreated 3.0 percent (only the biggest slip in two months). Aside from breaking recent records for momentum, we should note how universal the move was as evidence that a fundamental nerve was tapped. Considering the benchmarks for stimulus-supported risk appetite weren’t in freefall, we can deduct that this was yen-specific fare. It is therefore interesting to note that a ‘no-change’ outcome from the central bank was translated into a broad unwinding of yen crosses. This reaction tells us a lot about how far the market has priced in Japan’s stimulus effort. If an expected decision to keep the monetary base expansion target to ¥60-70 trillion leads to a reversal in the BoJ’s unspoken yen-devaluation effort, it suggests the market priced in too much. We’ve retreated to key support for USD/JPY (95) and other pairs, but what provokes this bear?

Euro: Will the OMT Hold Up to Market Pressure?
European policy officials were debating the efficacy and legality of the Outright Monetary Transactions (OMT) program this past session. Both the ECB’s Asmussen and Bundesbank’s Weidmann were testifying to the German Constitutional Court this past session with mixed views. Weidmann voiced his belief that the central bank was not responsible for absorbing the excess risk of sovereign debt. However, it was the generally supportive Asmussen that earlier posed the more interesting question: what happens to those countries that need help but don’t meet the requirements of the OMT? This is a more likely scenario than the market seems to be considering as general risk appetite holds buoyant. But for how long? Spanish, Italian and Greek 10-year bond yields are up over 18 percent from May lows…

New Zealand Dollar: Setting Expectations for the RBNZ Rate Decision
Top scheduled event risk for the next 24 hours of trade is the RBNZ rate decision. However, this may be a title in recognition rather than probability for market influence. The Reserve Bank of New Zealand has maintained its benchmark lending rate at 2.50 percent since its last cut back in March 2011. Looking at overnight swaps, the market see zero probability that a change in this rate is on the menu – though the 12-month forecast is still showing debate over the chances of a 25bp hike. What we should really look for in this particular meeting – and those over the coming months – is the level of concern in market volatility and expectations of inflation. While Governor Wheeler is unlikely usher a rate change in, he has shaken the market with the admission of modest intervention back on May 8. How consistent is this effort..

British Pound Looks to Jobs Data to Push GBP/USD Above 1.5700
There is still considerable speculation over the probability of the Bank of England (BoE) changing its monetary policy bearing when new Governor Marc Carney comes on board as well as the changes that would come should a ‘Triple Dip’ recession threat return. Yet, both of these vague concerns are further into the future than the average FX trader typically scans. Therefore, we shouldn’t assume these drivers will have sway unless there is something to materially stir them. Meanwhile, we look for cross currents – like the dollar’s tumble for GBPUSD – or look for event risk that can stir short-term volatility. In the upcomingsession, we have the May employment figures. This could theoretically change the fate of future GDP readings or monetary policy; but we are likely to see far more concrete results in short-term volatility.

Swiss Franc: Parliamentary Committee May Disrupt Break of Bank Secrecy
Over the past three years, most of our analysis for the Swiss franc was sourced from risk trends (as a safe haven) or the euro (due to the unnatural hold for EURCHF at 1.2000 due to manipulation). However, the evidence that the franc is moving further and further away from these dynamics continues to grow. Correlations between the Swiss currency and its Japanese and US counterparts have retreated. Further confirmation of this separation is seen in the level of swing for pairs like USDCHF and EURCHF. There is something far more prolific at work that can unseat the franc’s normal fundamental role. This past session a committee for the Swiss Parliament recommended a vote against law that would allow banks to circumvent secrecy laws while providing US authorities documentation on its citizens that sought out bank accounts to avoid taxes. This can substantially change the ‘safety’ appeal of the currency. The Upper House is set to vote on this bill today.