Tumultuous Tuesday: Dollar-Bloc Sinks, Stocks Slide

There are two main developments in the foreign exchange market as North American participants return to their posts. First, the yen has rallied in response to the BOJ's failure to take fresh initiatives to ensure the stability of the bond market. There had been some hope/expectation that Kuroda and Co would extend low rate funding supply operation from 1-year to 2, or possibly even 3 years. This was understood to be similar to the ECB's LTRO. When this did not materialize, the yen began recovering from the post-US jobs slide and took the Nikkei and JGBs with it.

The Nikkei had initially built on yesterday's gains, but following the BOJ meeting, it slumped to close down almost 1.5%, led by energy and financials. The 10-year JGB yield rose almost 5 bp to 0.89%, a seven-day high. The yen went bid, with the dollar falling from the JPY99 area to below JPY96.50 briefly. In a few hours,it has retraced more than 61.8% of its rally off the pre-weekend dip below JPY95.00. A move back above JPY97.50 is needed to stabilize the technical tone.

At the same time, the Australian and New Zealand dollars spiraled lower, each losing more than a cent against the dollar. The proximate trigger was soft Australian housing finance data (0.2% vs consensus 0.8%), but sentiment has been poor and the Chinese data over the weekend did not help matters. The Aussie has now dropped 4.5 cents over the past seven sessions. The shorts are getting crowded, but a break of the three-day base near $0.9400 has been taken out and only a close above there will deter additional near-term losses.

The New Zealand dollar's slide appears largely in sympathy with the Aussie and does not appear to have a separate catalyst. New Zealand officials have made it clear that they want a weaker currency and the RBNZ has intervened in what seems to be largely token amounts to drive home its point. It meets on Thursday and is likely to welcome the lower kiwi, while keeping policy on hold. The next objective is near $0.7300.

News that UK industrial production rose for the third consecutive month for the first time since November 2010-Jan 2011 and that home prices rose the most in 3-year in May (+5 from +1 according to RICS) failed to lift sterling. The 0.1% rise in industrial output in May was largely a function of mining and quarrying. Manufacturing itself fell by 0.2%. As was the case yesterday, it continues to trade within last Friday's trading range. For the better part of the past two weeks, the 5-day moving average, which now comes in near $1.5538, has generally held down-ticks in check. It is hard to get excited about sterling's prospects here, but a close above $1.56 would be constructive.

For its part, the euro is firm. It has recorded a 3-day high just below $1.3300. Last week's Draghi-fueled high was a little higher (~$1.3306) and the 61.8% retracement of the slide from the early February high near $1.37 is found near $1.3340. News on the ground is light and there is much attention focused on the German Constitutional Court hearing that has begun. The hearing continues tomorrow. It is important to realize that no decision is expected for a few months.

European bourses are under pressure, with the Dow Jones Stoxx 600 off by more than 1.5% near midday in London, led by basic materials, financials and consumer goods. The equity markets seem to be responding not just to the sell-off of the Nikkei, but also a steep sell-off in the bond markets.

US 10-year bond yields are about 5 bp at 2.26%, a new high since early last year. Neither the S&P upgrade of the US sovereign outlook nor Bullard's reference to low inflation was a sufficient deterrent to the bears. European interest rates are rising as well, with core bond yields up 2-4 bp, while Italy and Spain are up 15 bp and Portugal is 34 bp higher. Emerging market bonds are buckling under strong selling pressure and this is weighing on the respective currencies as well.

The US economic calendar is light and wholesale inventories and the JOLT report typically are not market movers. The S&P 500 is expected to gap lower at the opening today. Recall recent developments. Last Thursday, the S&P 500 completed a 5% pullback from the highs and was snapped up, closing broadly higher, and then gapped higher on Friday. That gap (1622.56-1625.27) was not closed and at yesterday's gains, it had retraced a little more than 50% of its decline. What happens to today's anticipated gap lower opening is important from a technical perspective. If it is unfilled, it would create a potentially bearish two-day island in its wake.