Dollar Consolidates Losses

The US dollar briefly extended its pre-weekend decline, but has settled into a consolildative tone.  Additional modest dollar gains may be seen in North America, but selling into bounces is likely to dominate as a full blown crisis in Europe is avoided for the time being and this allows near-term focus to shift back to weakness of the US economy and the divergent monetary policy paths. 

The central banks of Australia and New Zealand meet.  The former is likely to maintain signal that further tightening is needed, while the latter may express concern about the currency strength.  In Europe, the BOE and ECB meets.  The BOE will not do anything, and unlike other central banks, when it doesn't do anything it doesn't say anything.  The ECB is a different kettle of fish.  The OIS Swaps market has nearly fully discounted a July rate hike.  The market expects Trichet to use word cues to confirm expectations.

Therefore this could be the big event risk of the week.  That Trichet, who insists the ECB does not pre-commit fails to use the word cues or that there is a buy the (euro) on rumors of a Trichet's signal and sell the fact.

The dollar hovers near JPY80, but the risk of interevention remains low.  The key point when thinking about intervention, is not a particular level but volatility and implied yen vol reamisn at the lower end of where it has been since the coordinated intervention.   Separately, note that Moody's warns that with Kan set to step down in August and that the "revolving door" does is a negative factor.  Late May, Moody's placed Japan's Aa2 on credit watch. 

The EU/ECB/IMF are now commonly referred to as "troika".  What a quiet transformation has taken place.  The IMF used to be seen by its critics as an arm of the US Treasury.   Over the past year or so, the IMF has moved away from the Washington Consensus.  And now the IMF is seen as an arm of European policy.   Yet this seems to be an exaggeration and look for the "troika" to become decoupled again.    DSK's personal life has now and belatedly been criticized, but his public life still seems to be thought in favorable terms.  This too might not last.  The move away from the Washington Consensus and re-invigoratino of the IMF after its near-death may not owe itself to DSK as to the increased voices of G20 within the IMF and the European debt crisis itself. 

Portugal's election appears to have created the conditions of a majority government.  The replacement of a minority government by a majority government is a favorable devleopment and Portuguese bonds are outpeforming slightly, thought eh five-year credit default swap is higher. 

Euro support is seen in the $1.4575 area.  A break could signal another half cent decline.  Sterling support is pegged in the $1.6360-80 area.