Forex Market Update: Strong Equity Rally Puts USD Back On The Defensive As Another Day Sees Yet Another Direction Change

Daily Forex Fundamentals | Written by Saxo Bank | Jun 26 09 06:54 GMT |

Bonds also rally, keeping JPY crosses relatively contained despite strong risk appetite HEADLINES - PREVIOUS SESSION New Zealand Q1 GDP fell -1.0% QoQ vs. -0.7% expected Japan May CPI fell -1.1% YoY and fell -1.1% ex Fresh Food vs. -1.0%/-1.1% expected, respectively THEMES TO WATCH - UPCOMING SESSION Germany May Import Price Index (0600) Sweden May Trade Balance (0730) Switzerland Jun. KOF Swiss Leading Indicator (0930) US May Personal Income and Spending (1230) US May PCE Core (1230) US Jun. Final University of Michigan Confidence (1400) US Fed's Fisher to Speak about US Economy (1700) Market Comments Equities rallied strongly into the North American close and knocked the USD well back from the strongest levels it posted after the FOMC meeting. The final auction of the week - this time for $27 billion of 7-year notes - from the US treasury saw heavy bidding and interest rates also headed lower. We'll refrain somewhat from the usual picking apart of the intermarket movements, as behavior has diverged sharply from past patterns and it feels like the markets are a bit chaotic here and scrambling for a new toehold on what is going on. For the shortest term, the USD weakening today may have simply been an unwinding of USD buying in the wake of the FOMC meeting and we're back to square one. Looking at the charts, the dollar index has gone into hibernation for almost three weeks now since the lows below 80.00 were rejected about a month ago. The equity rally came at a key technical pivot point today, as technicals were looking ominous for major indices like the S&P500 and its flirtation with the 200-day moving average and recent lows. This allowed FX to continue the range trading as well and prevent any further directional signals from developing. The strong rally in bonds after the US auction (and reversing the kneejerk sell-off induced by the Fed's lack of new debt buying announcements on Wednesday) was constructive for the Japanese Yen, but the risk appetite in evidence elsewhere confused the picture and instead, the JPY eased a bit lower on the day, though it did gain vs. the greenback. Japan's ex Fresh Food year-on-year CPI measure registered the lowest reading in the 38-year history of the series. The Fed's Bernanke faced a very tough panel of House interrogators yesterday on his actions related to the Bank of America/Merrill Lynch deal, who are trying to score political points for their constituencies. The questioning session was quite a spectacle, as some representatives' questioning techniques and tone bordered on lack of respect at times. Mr. Bernanke bore himself with dignity and did not appear as testy or indignant as the situation certainly justified. It is interesting to note, as a few articles pointed out, that Fed criticism is actually intense from both sides of the aisle - from the Republican minority which is aghast at the level to which the government and the Fed have intervened in the economy, and from the left, which is aghast at bankers' continuing to make hay regardless of the weather. It will be interesting to see how Bernanke's star fares as we head towards his potential January renomination. If the economy continues to sour between now and then, every political leader will be looking for a scapegoat. New Zealand suffered worse than expected contraction in its GDP in Q1, and the vastly stronger kiwi probably isn't doing much to help out the situation in Q2. Shouldn't the kiwi rally be tiring here? We're scanning the calendar in vain for catalysts today. Next week will hopefully provide sufficient impetus for pushing the market action out of these mind-numbing ranges. The ECB and the US employment report are putting in a rare appearance on the same day Thursday next week as US markets have a holiday-shortened week due to the Independence Day holiday. Analysis Disclosure & Disclaimer SaxBank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by SaxBank that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis dnot occur as anticipated. 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