USD/JPY Slips Below 95 As Nikkei Collapses 6 Percent

Both the US dollar and S&P 500 futures have made ominous moves over the past 24 hours to threaten long-term trend changes. While the recent, positive correlation between the benchmark equity index and currency would seem to suggest that both are susceptible to a collapse; the change to the fundamental landscape under such seismic shifts would likely revive the ‘risk / safe haven’ dynamics that the dollar seems to have abandoned. The line in the sand both FX and capital market trader should watch for is 1,600 on the S&P 500. The combination of the 50-day moving average, seven-month channel floor and psychological appeal of a round number can draw enough attention that its failure can set off a tidal wave of pent up fears. Global market yields are just off record lows; the Federal Reserve is running short on flexibility to continually drive markets higher; growth forecasts have cooled; volatility measures are rising; and leverage (measured on the NYSE) is at a record high. These are troubling but vague conditions. What better way to bring them all to the surface than a pressured selling / deleveraging?

In a market where over-exposed market participants have to quickly unwind geared trades, there is a high risk of panic. The greater the sense of unstable markets, the more extreme the need for refuge in absolute liquidity and financial assurance. In such tumult, the deepest market, largest economy and most dependable regulations trump yield or long-term fiscal debate. And, that leads the battered back to the United States and the US dollar. However, that unflinching flight to quality must be engaged to fight the dollar’s countervailing wind: fading ‘Taper’ premium. Depending on the traditional sparks for reviving fear leaves us with a docket lacking event risk until next Wednesday’s FOMC rate decision. If we are to see a shift to risk aversion before that high-profile event, it will likely be borne from market sentiment itself.

If US equities can find a floor once again in the upcoming session, the stability could bode poorly for the greenback. Since the beginning of the month, the currency has shed gains forged under the auspices of a June tempering of the $85-billion-per-month QE3 program. The consensus now projects a September or later date for that safety net withdrawal. A significant level of premium has been extracted, but a break of 10,500 for the USDollar Index could escalate the effort. Meanwhile, the market is still showing its consciousness of the Fed’s eventual withdrawal of support. The US 10-year Treasury auction this past session drew its second lowest demand since August 2009 and volatility is trending higher.

Japanese Yen: USD/JPY Slips Below 95 as Nikkei Collapses 6 Percent
USD/JPY slipped below 95 for the first time in over two months in early Asia session trading – and all it took was a six percent collapse in Japan’s benchmark Nikkei 225 equity index. The benchmark gapped lower on the open of the new trading session and extended the incredible bearish drive to an incredible 20 percent collapse in a mere three weeks. If the Bank of Japan’s (BoJ) primary goal with its stimulus regime is to revive inflation and eventually reach a 2.0 percent target, they can still find success. However, they are causing severe damage along the way. Stable financial markets is an unspoken mandate for central banks, yet the BoJ’s efforts have generated severe fluctuations. The highest, sustained level of volatility in equities since 2008 and sharp increase in JGB yields (a serious problem for the government and pension funds) is collateral damage they simply cannot endure. The only option from here is more stimulus. ‘How’ and ‘when’ are key to preventing a yen cross cave in.

British Pound: Despite Rally After Report, GBP/USD Yet to Break 1.5700
Despite better-than-expected employment data, the British pound struggled to gain its footing this past session. The statistics showed the number of jobless claims dropped by a greater-than-expected 8,600-filings and the unemployment claimant rate held at a two-and-a-half year low. Yet, the sterling sank versus NZD, AUD and CAD. There was not enough in the data to significantly alter what truly matters to pound traders: stimulus and growth forecasts. Meanwhile, a Reuters poll showed economists expect BoE’s Carney to offer guidance first thing July.

Euro Rallies to February Highs Despite Greece TroublesThe Greek government’s decision to close state broadcaster ERT seems to have had greater repercussions than officials had expected. Protests are to be expected, but rumblings of a call to dissolve the government generate enough real heat to concern euro investors that have just recently become used to market stability. This is just an attention grabber for bigger concerns in the background. The German Constitutional Court is questioning the ECB’s ability to use the OMT and 10-year sovereign bond yields are on the rise again.

Canadian Dollar Looks to Break Chop with BoC Financial Stability Report
Despite the heavy moves from AUD/USD and NZD/USD, USD/CAD can’t seem to keep to a consistent trend. That is not particularly surprising as this is a pairing of two financial systems whose health often moves in tandem. We may finally find a break from the monotony of congestion around 1.0200 in the upcoming session with the Bank of Canada’s release of its Financial Stability report. We are unlikely to see much change from previous concerns, but this could be an ‘unexpected risk’ that catches the market off guard.

Swiss Franc Gains, USD/CHF Hits 4 Month Low after Tax Evasion Vote
The Swiss government took a big step towards allowing the country’s banks to surrender US client information to US regulators without breaking the nation’s banking secrecy laws after the Upper House of Parliament approved a bill with those conditions. It must still pass the Lower House, but what are the implications? Long-term, this will damage the franc’s unique position as a safe haven. However, it is a better option than the alternative. If the US were to bring suit against Swiss financial institutions for aiding tax evaders, it would likely lead to bank failures.