US Dollar Finds Volatility With Manufacturing Survey, Safe Haven Flows

There is a considerable amount of event risk on the global economic calendar this week; but the US dollar is looking to only a few heavy-hitting fundamental releases for price action. The first of these major market movers was this morning’s ISM manufacturing survey. In the recent past, this indicator had actually beat out the non-farm payrolls release for generating volatility. However, this was not the case for the May reading. The manufacturing activity gauge beat the market’s forecast for a slight contraction by jumping a whole percentage point to 49.6. However, the bullish sentiment this indicator would generate was naturally limited by the fact that the sector contracted for the fourth consecutive month (implied by a reading below 50.0). The indicator’s components further revealed that the month-over-month improvement was based largely in exports, which hit a four year high, thanks to the weakness of the US dollar. In contrast, new orders fell for a sixth consecutive month while employment contracted for a seventh straight month. Outside of the economic docket, the dollar was also seeing its safe haven status bolstered. Speculation that another UK bank may be on the brink of bankruptcy and a round of downgrades for a number of major investment banks’ debt lead many investors back to the stalwart dollar and Treasuries.

Euro Strength Is Hurting Manufacturers, But Don’t Expect A ECB Rate Cut This Week

The euro consolidated between 1.55 – 1.56 on Monday, closing little changed from Friday’s New York close, as Euro-zone data pointed to an economic slowdown, while comments from an event to mark the ECB’s 10th anniversary reiterated the Bank’s hawkish tone. First, the final reading of the purchasing managers’ index for the Euro-zone manufacturing sector slipped to 50.6 in May from 50.7 in April. Indeed, sentiment amongst European businesses, especially producers, has suffered as record high commodity prices are squeezing profit margins while the euro's appreciation hurts foreign demand for exports. On the other hand, multiple ECB policy makers continue harp on inflation pressures, as ECB President Trichet noted that “price stability is a prerequisite for financial stability” while ECB Governing Council Member Klaus Liebscher said "we will do everything needed for inflation to recede again." It is rather clear that the ECB has no room to cut rates in the current price environment, and as a result, the Bank will have to ignore signs of an economic slowdown in order to focus on maintaining price stability. While this leaves the odds vastly in favor of the ECB maintaining neutral policy on Thursday, traders should keep an eye on Tuesday’s Q1 GDP release for the Euro-zone, as any revisions will spark significant volatility in the euro.

British Pound: Will The Next Credit Crunch Be Triggered By The UK?

The British pound gapped lower at the start of trading this week to tumble toward support at 1.96, as conditions in the UK deteriorate further. From an economic perspective, the UK housing and manufacturing sectors are taking a heavy hit, as BOE mortgage approvals slumped to 58,000 in April – the lowest since record keeping began in 1999 – while the manufacturing purchasing managers’ index for the UK tumbled to a reading of 50 from 51, indicating that growth in the sector has stalled. Perhaps the most daunting piece of news was an announcement from Bradford & Bingley, the UK's largest lender to landlords. B&B appears to be in trouble financially, as they said they would sell shares at a 33 percent discount amidst deteriorating housing market conditions. The news led Fitch Ratings to cut its long-term default rating and placed the firm on “watch negative,” and while B&B’s Chairman has affirmed that the company remains “well capitalized,” it is obvious that the UK financial markets are far from stable. The BOE has already stated that there are significant risks associated with mortgage-backed securities in the UK, particularly commercial ones, and if property values continue to plummet as they have in the US, the global credit markets may be hit by yet another wave of severe tightening

Commodity Dollars: A Concentrated Docket Promises Serious Volatility For The Aussie Dollar

There was little consistency across the commodity bloc Monday as risk sentiment and scheduled event risk took the reins on price action from the relatively inactive futures market. However, the group’s correlation to commodities wasn’t totally overlooked by the market as the recent pullback in crude prices allowed USDCAD bulls to bring the pair back above parity through the early hours of the US session. This notable move aside though, the Australian currency was the undisputed leader for activity thanks to an extremely concentrated economic calendar that is almost guaranteed to stoke volatility over the next 48 hours. The fundamental waves began as a swell this morning with a list of top tier indicators. Among the numbers, the retail sales report’s unexpected 0.2 percent contraction was of primary concern – especially with first quarter GDP due tomorrow evening. However, the negative sentiment this indicator would lend the currency (along with a disappointing manufacturing survey) was ultimately offset by a better than expected TD inflation figure and first quarter company profit report. The greatest probability for price action however likely rests with the RBA’s rate decision and comments due in just a few hours.

Japanese Yen Surges As Risk Aversion Rears Its Head

A return to risk aversion rippled through the markets on Monday, leading the Japanese yen to surge almost 1 percent across most of the majors. Indeed, conditions were indicative of market-wide flight-to-safety, as the CBOE Volatility Index (VIX) saw its biggest single-day gain since March, the DJIA and S&P 500 both fell more than 1 percent, and US Treasuries rocketed higher. On the other hand, Japanese economic data reflected further slowing in wage growth, as labor cash earnings rose a tepid 0.6 percent in April from a year earlier, down from 1.5 percent the month prior. Clearly, risk trends remain the primary driver of the Japanese yen and as a result, traders should perhaps keep an closer eye on broad market conditions rather than economic data specifically.

Kathy Lien is the Chief Currency Strategist at FXCM.