Dollar Recovery Grows More Difficult with Fed Speakers on Deck

Talking Points:

• Dollar Recovery Grows More Difficult with Fed Speakers on Deck
• Euro Dependency on Volatility Intensifying
• British Pound and Rate Forecast Strength the Burden of Data to Maintain

Dollar Recovery Grows More Difficult with Fed Speakers on Deck

The rebound the US Dollar mounted through the second half of this past week was an opportunistic move derived as much from market conditions as fundamentals. To keep its favorable trajectory, the greenback needs to find more tangible endorsement. With this new trading week, there is potential that the passing of the seasonal low in volatility associated with the Independence Day holiday – within the ‘summer doldrums’ – can in turn shake loose the contentedness seen with the historical drop in activity measures over the past months and years. Yet, neither the world’s most liquid currency nor its other speculative benchmarks are immediately offering up a change in participation and the revival of risk premia that fuels trading. For the Dow Jones FXCM Dollar Index (ticker = USDollar), a slight decline further disarms the 0.8 percent rally from last weeklows. Elsewhere, volatility measures are only slightly higher and volume behind S&P 500 was still under 400 million shares – collectively reflecting a slow return to speculative form.

Through more active fundamental channels, the dollar will see interest rate interests stoked through the coming session. Two Fed officials are scheduled to speak in the upcoming session. Richmond Fed President Jeffrey Lacker will weigh in on the economic outlook at 17:00 GMT. A known hawk, Lacker is not a FOMC voter this year, but he will be in 2015 – the crucial period in which the central bank is expected to begin its foray into policy tightening. Meanwhile, current voter Minneapolis Fed President Narayana Kocherlakota would generate the most interest if he were to stray from his aggressively dovish bearings when he speaks on monetary policy at 17:45 GMT. Despite a recent rally in Treasury yields at the shorter end of the curve (particularly 2-year), the market’s forecast for US rates is still trading at a meaningful discount to the Fed’s own projections. Fed Funds futures show a 33 bps discount to the central bank’s 1.13 percent forecast for rates at the end of 2015, and 68 bps below the 2.50 percent FOMC projection for 2016.

Euro Dependency on Volatility Intensifying

Currently, the 60-day (3 trading month) correlation between EURUSD and the FX-based volatility index is positive. That would insinuate that a rise in activity and ‘fear’ would benefit this pair. However, the comparison between the two is distorted by the exceptional level of complacency. A more meaningful connection between market activity and the Euro is the volatility index’s correlation to the periphery government bond yields. Over the same period, the two-year Spanish yield’s correlation to the same pair is currently 0.7 (strongly positive) and has been in positive territory for most of the past five years. What does this mean? The speculative capital flowing into the riskier areas and assets in the region are following the same channels of complacency that equity indexes are climbing. Therefore, a record-breaking appetite in Eurozone government bonds (as a proxy for the broader markets) is just as prone to deleveraging as the S&P 500.

British Pound and Rate Forecast Strength the Burden of Data to Maintain

A proprietary consumer index from Llodys released this past session reported a softening sense of optimism in the labour market with a June reading of 1 percent – following the previous update’s net 4 percent projecting improved conditions. Yet, what is more interesting in this report was the increase in those expecting a rate hike from the BoE over the next 12 months – 68 percent versus May’s 59 percent. Citizens are preparing for what the market has already worked into the sterling. Yet, from the market’s perspective, that first move is virtually priced in and set very far forward in the curve. In essence the pound bulls are ‘pricing in perfection’. Their burden is to maintain optimism to keep the currency buoyant, much less rising. With a round of data ahead, this difficulty should not be underappreciated.

Canadian Dollar Worst Performer on the Day On Weak Data

The Canadian Dollar was the worst performing major through Monday’s session – dropping between 0.3 to 0.8 percent versus the Pound and Yen respectively. This weakness was heavily sourced in the poor data that the currency absorbed. While building permits in May surged, a June manufacturing survey posted one of its worst readings in five years, while 2Q business and lending surveys both slid.

Chinese Yuan: Discussion about Exchange Rates and Monetary Policy Ahead

With the Chinese Renminbi attempting to regain its footing against the US Dollar over the past few months, FX traders are looking for distinct catalysts for this future FX liquidity yardstick. A long-term consideration, the upcoming annual Strategic and Economic dialogue between the US and China will be point of interest for investors as they read on topics like the Yuan’s exchange rate and Fed’s global monetary policy impact.

Emerging Market Currencies off to a Weak Start

While the Emerging Market ETF – reflecting capital markets – was little changed from its perch at 12-month highs, the segment’s currencies were not doing well. Aside from an impressive 1.8 percent rally from the Indonesian Rupiah, the high risk – high yield currencies were broadly lower against the US Dollar. Once again, the Brazilian Real, Mexican Peso and Russian Ruble were leading the slide.

Gold Threatens Bearish Turn Despite a Surge in Speculative Futures Interest

Technical traders would not hesitate to point out the head-and-shoulders pattern forming on gold. Fundamental traders wouldn’t would see the same lack of progress after last month’s climb and the absence of an imminent key driver – financial catastrophe, dollar plunge, stimulus swell. This hesitation comes despite a 147 percent, four-week rally in net long gold futures holdings though this past week…**Bring the economic calendar to your charts with the DailyFX News App.

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INTRA-DAY PROBABILITY BANDS 18:00 GMT

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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