Some Miscellaneous Thoughts about the FX Price Action

Today is the end of the quarter so we will get the IMF's COFER report on currency reserves from Q1. This is when the dollar was very strong. We should therefore expect the dollar value of reserves to fall and for the dollar's share to rise purely on valuation effects.

The Federal Reserve will update its measure of the real broad trade weighted dollar for June. It likely fell for the third consecutive month. Lastly, here in Q2 the dollar fell against all the major currencies but the yen and New Zealand dollar. The story behind the Kiwi's weakness is the swing in expectations. RBNZ cut rates once and hinted at an additional rate cut (or two). The Kiwi lost about 9.5% this quarter. 

The dollar appeared to move to a slightly higher range against the yen in May and has been consolidating in June. The yen is actually up 1.4% this month. Sterling is easily the best performing currency this quarter, gaining 6%, with almost half registered this month as expectations for a rate hike have been brought forward by stronger wage growth and hawkish comments by a few MPC members.

The euro staged what appears to be one of the largest reversals in history yesterday.  There seems to have been two general forces at work.  First, some short-term participants jumped on the weekend news and obviously sold the euro off in Asia.  When the momentum faded, they were forced to cover shorts and as the short squeeze ensued, new longs were established. It may be too that the fear of losing euro funding prompted some non-EMU banks, especially in London to secure such funding, just in case, to prepare for possible disruption after the Greek referendum. 

Second, the Swiss National Bank confirmed intervention to buy the euro.  The amount is not clear, though the SNB's reserves figures will later give us a sense of the size.  Separately, there was talk of euro purchases against sterling within the Eurosystem ( a European central bank) that is often seen at quarter end. 

Separately, there were rumors that the ECB may have intervened covertly.  It is thought the officials would want to show the market's resilience.  This does not seem particularly likely.  While the recovery of the euro may speak to the resilience, the large drop in equity markets and in peripheral bonds means one would not have to look far to see the stresses.  

Look for the euro to be confined to a $1.1130-$1.1250 range in the near-term.   We suspect that the dollar's dip below JPY122 may have exhausted the dollar selling pressure.   There is the gap created by yesterday's sharply lower opening may draw prices.  That gap is found between JPY123.19 (yesterday's high) and JPY123.23 (last Friday's low).   Sterling appears neutral in a $1.5660-$1.5800 range.  

Disappointing domestic survey data heightened expectations that the Reserve Bank of New Zealand will cut rates at its next meeting (July 23) and signal scope for additional rate cuts.  The New Zealand dollar is trading at new multi-year lows today.   It is difficult to talk about meaningful support until closer to $0.6500--a little more than 2.5 cents from current levels.  Australian data in the form of private sector credit expansion was in line with expectations rising 0.5% in May for a 6.2% year-over-year rate.  The RBA meets on July 7.  In an earlier note, we erroneously suggested the market was pricing in a rate cut.  The consensus calls for policy to remain on hold after the May rate. 

The Canadian dollar was tarred yesterday.  The US dollar held the top of its three week range (~CAD1.2425-50).  It has stabilized today.  Dollar support is seen near CAD1.2300. 

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