Dollar: ‘Twas The Day Before The Fed And Not A Trader Was Stirring

Small victories. The Dow Jones FXCM Dollar Index (USDollar) closed higher for the first time in five trading days, but by a tepid 0.1 percent on a particularly small range of 49 points. The markets are on edge ahead of Wednesday’s Fed rate decision. Against the backdrop of a very real chance that the world’s largest monetary policy supporter announces plans for a near-term ‘Tapering’ of its monthly QE3 injections – possibly even an immediately effective reduction – there is a serious curb on investors’ positioning until the heavy weather passes. In the meantime, there are tight technical patterns that present short-term breakout risks on various dollar-based pairs such as EUR/USD, GBP/USD and USD/JPY. Under these conditions, breakouts are likely; but follow through is very unlikely. Trade appropriately.

Japanese Yen Volatility Eases, Still Trending Higher
According to Japanese Finance Minister Aso and Chief Cabinet Secretary Suga, ‘Abenomics’ was received with overwhelming support by the G-8. The confidence this one-sided assessment inspires is rather limited, however, as the market is quick to recall similar statements made before the G-7 and G-20 meetings whereby both groups released statements that demanded / reassured that major economies would not purposefully manipulate their exchange rates for a competitive advantage. There is unlikely to be additional pressure laid upon the world’s third largest economy at this meeting given the recent volatility in the nation’s markets. Volatility measures for the Nikkei, Japanese Government Bond (JGB) and Japanese yen have all eased through this past session. Yet, with the Nikkei 225’s VIX still at 38 percent (the US S&P 500’s is 17 percent) and USD/JPY expected volatility one week forward twice that of EUR/USD at 17 percent; it is easy to set this market alight.

Euro Gains Traction Despite Weak Trade Data, Greek Rumblings
The Euro gained ground against all of its counterparts through the opening session of the week – though there was relatively little progress on the drive. When we have market-wide moves – bullish or bearish – it is sound sign that the particular currency itself was responsible for the move rather than the influence of ‘fundamental crosswinds’. The docket for the shared currency was relatively light for traditional indicators. Eurozone trade figures for April top the list with a €14.9 billion surplus that materially curbed the record €22.5 billion surplus from the previous month. Attempting to scratch the surface of the market’s indifference to returning regional financial troubles, we had a number of policy officials/groups deliver statements. Greece’s Prime Minister Samaras said national broadcaster ERT could be reopened, while Reuters noted that a cabinet reshuffle could come at the end of the month – attempts to quell growing backlash to austerity. Meanwhile ECB’s Weidmann and Mersch both spoke to the limitations to stimulus. On a positive note the Bundesbank upgraded its Germany 2Q GDP forecast, saying it likely ‘improved markedly’. In the upcoming session, a Eurozone ZEW (investor sentiment) and ECB President Draghi speech top the docket.

Australian Dollar Traders Should Keep an Eye on Bond Auctions
Adding to Monday’s slide, the Australian dollar is slowly extending its decline this morning. Through the opening session, risk trends were in control of the carry currency. Yet, this morning, the fundamental drive is closer to home. Both the RBA minutes’ comments and the results of a bond auction crossed the newswires this morning. The Treasury sold A$200 million in 2025 inflation-linkedbonds with a 1.16 percent yield and to 3.28 times demand. For comparison, a 2030 bond that was inflation linked drew a lower yield of 0.93 percent – suggesting fading appetite. As for the RBA minutes, scope for further cuts takes a backseat to a big increase in mentions of the Aussie dollar. Currency war participant?

British Pound: May CPI Data Sets Up Carney’s First BoE Move
We are in a transitional period for UK monetary policy. The probability of a change to policy and stimulus for the coming weeks is extremely small as Governor Mervyn King is bowing out and incoming Governor Mark Carney must get up to speed. Carney takes the reins officially on July 1 which means his first policy meeting at the helm will be the July 4 meeting – well timed for thin markets given the US holiday. That policy meeting will use the inflation statistics that are due in the upcoming London session. The year-over-year consumer (CPI) figure is expected to rebound from its second lowest read in three years (to 2.6 percent), but not enough to materially offset growth concerns. Anything that comes within reasonable bounds (within 2.8 to 2.2 percent) will likely be put on ice as the pressure will not be great enough to force a new Governor’s hand. Meanwhile, an eye should be kept on G-8 commentary from the UK’s side to establish trade, tax, foreign relations plans.

Swiss Franc Faces SNB Pressure and Loss of Banking Sector Appeal
The Swiss franc is a safe haven in the FX world for a multitude of reasons. However, both the government and central bank officials are threatening the long-term appeal of opening a legendary ‘Swiss bank account’. This week, both sides will weigh in on their effort to dissuade the inflow of international capital seeking harbor from financial instability and taxes. The Swiss National Bank (SNB) is scheduled for Thursday, but the threat of negative rates on excess reserves deposited on behalf of the nation’s banks still hangs heavy in the air – even if it is unlikely to be genuinely entertained by the group. More imminent and permanent to the franc is the wave of support to open Swiss banks’ books on foreign clients to foreign tax collectors. Swiss Finance Minister voiced support on an international effort to prevent tax evasion. In the upcoming session, the Lower House of Parliament is set to vote on this topic. The Upper House has already passed the bill.