Dollar Stumble Yet To Reverse Bull Trend

Having marked a critical, bullish rally just this past Friday; the Dow Jones FXCM Dollar (USDollar) took a concerning break to open this week. The 0.3 percent retreat by the benchmark index was the steepest in over three weeks and was backed by a market-wide decline against all of its major counterparts. Yet, it would be premature to call Monday’s performance a true reversal of trend. Over the past month, USDollar has rallied over 500 points – a move that effectively drove the index to three-year highs. We can see the same impressive performance – and comparatively mild correction – in pairs like EUR/USD at 1.2800, GBP/USD at 1.4850, USD/JPY above 101 and AUD/USD keeping to 0.9050.

A hesitance found in the technical picture is mirrored in the fundamental backdrop. A dollar reversal is best served by a swell in risk appetite that undermines the safe haven appeal of the reserve currency. Futures on the S&P 500 equity index – my preferred measure of speculative appetite as it represents a traditional ‘risk’ asset and is backed by the artificial support found in stimulus – rose for a fifth consecutive trading day through Monday’s close. That has ushered the market back to three-week highs and sets ambitious bulls’ sights on the record highs set back in May. However, despite the consistency, progress has been particularly slow. Drawing fresh capital into a mature trend requires encouraging growth forecasts and appealing rates of return against low levels of volatility (‘risk’). Those elements are certainly lacking. But more importantly, the subsidy found in stimulus is also at risk. This past Friday, the June employment figures beat the consensus forecast for payrolls and held the jobless rate at 7.6 percent. This is a trend that keeps the expected September Taper timeline for the Fed on track.

While a flight to safety presents the greatest potential for carrying the dollar higher moving forward, it is important recognize that the greenback doesn’t require that overwhelming pessimism to advance. It simply means that the opposite – an appetite for yield that drives waves of capital to riskier assets and away from the US markets – cannot be in control. The positive correlation between dollar and equities along with the restrained advance from the latter speak to this absence of conviction. And, without a proactive extreme of either greed or fear; there is still the expectation of the Fed’s eventual easing of monetary policy working in currency’s favor. This past session, consumer credit data for May supported consumption trends. Looking ahead to Tuesday, the NFIB Small Business Optimism indicator will be assessed for its growth reading properties as this segment accounts for the vast majority of jobs in the US. Meanwhile, the IMF’s Global Economic forecast updates are due for release at 13:30 GMT and we can gauge the market’s Taper fears in a planned 3-Year Treasury note auction at 17:00 GMT.

Euro Gains Little Traction on Greece, Portugal Defuse
Euro-area investors are growing increasingly blasé about the frequency of financial and fundamental risk to regional stability. Through Monday, two particularly ominous clouds were lifted – yet the euro was as indifferent to the relief as it was to the initial problem. Over the weekend, Portuguese Prime Minister Coelho averted an early election that threatened austerity efforts and market confidence by making the CDS party leader his deputy. Meanwhile Eurozone Finance Ministers decided at their gathering that Greece will be given support in stages despite missing austerity targets. The country has until July 19 to hit certain economic reforms. Yet, despite these encouraging developments, the euro struggled to advance. Perhaps this is recognition of lasting, systemic problems; but it’s more likely dangerous indifference.

Japanese Yen: How Many Pips is Further Evidence of Effective Stimulus Worth?
It seems there is a steady stream of data to support the success of Japanese policy officials’ effort to revive inflation and bolster economic activity. Through the opening session, yen traders absorbed news that a Bank of Japan (BoJ) survey found 80 percent of its pool expected prices to rise within a year – the highest percentage in nearly five years. Meanwhile, a Sankei report suggested that the government may hike the minimum wage by over 2 percent in the near future. That is encouraging news, but it wasn’t worth much yen depreciation…

British Pound Finds Limited Support on Growth Positive Data, Bigger Waves Ahead
Data from the UK docket late Monday supports a theme of economic stability and recovery that we have seen develop over the past month. The industry BRC retail sales report and RICS housing prices reports both offered encouraging readings of growth. The unusual release hours, lack of official credentials and distance from critical elements of economic activity however dampen the positive influence it could have on the sterling. The same is not true for the upcoming industrial production and trade data. A meaningful surprise can rouse the pound.

Canadian Dollar Slides as Lending, Business Sentiment Cool
A modest increase in building permits reported by Stats Canada did little to offset second quarter measures of lending health and business sentiment in Canada Monday. Company leaders downgraded their outlook for sales growth and intentions for investment as the global demand was expected to cool going forward. Meanwhile, lending conditions softened to a balance of -12.7 percentage points which maintains a condition of an easing credit environment since 2009. Housing starts data is due for release in the upcoming session.

Swiss Franc Drops as Banking Secrecy Breaks Down, Data Improves
Data on the Swiss docket was rather encouraging Monday, but the franc found little inspiration from the data. The 3.0 percent increase in 1Q industrial production and downtick in the June unemployment didn’t prevent the ‘Swissie’ from dropping against all but the US dollar. A more elemental concern is festering beneath the surface. A few days ago, the Swiss Federal Supreme Court approved the government’s request to release records on an American client of Credit Suisse in a tax evasion case. The country’s bank secrecy appeal continues to crumble.