Euro, Yen Rally as Dollar, Equity Markets Slip at Start of FOMC Week
- EURAUD continues to streak towards target above A$1.5300.
What's shaping up to be an important few days for the USDOLLAR Index technically also coincides with a bevy of top-tier event risk that will undoubtedly bring waves of volatility to FX markets. At the start of this critical week, the Euro is reestablishing itself as a funding currency, offering itself as a liquidity haven during non-Euro-centric financial market volatility. Such is the case overnight, where a -8% drop on the Chinese Shanghai index has stoked demand for relative 'safety,' pushing up both the Euro and (the more widely regarded funding currency) Japanese Yen.
In what may temporarily be a 'post-Grexit' world thanks to progress towards unlocking a €86 billion EFSF-sponsored bailout program, financial markets around the world - FX, bonds, and equities alike - are repricing cross-asset relationships amid reduced tail risk disaster scenarios. One needs to look no further than the tape to note that as the Euro has rallied at times over the past week, it has coincided with European yields falling and equity markets around the globe slipping. These are hallmark traits of a funding or liquidity currency (much like the Japanese Yen).
Beyond the further unwind in EUR-crosses as the market looks past Greece, the big focus over the next few days will be the Federal Reserve's July policy meeting conclusion on Wednesday. While it seems like a foregone conclusion that the Fed won't raise rates this week - the fed funds futures contract offers an implied probability of 0% - market participants are very interested in gauging the FOMC's temperature after several policymakers have hinted on optimism regarding the state of the economy and a chance of a rate hike in 2015. With markets still pricing in January 2016 as the most likely period for the first rate hike, any suggestion by Fed officials that a rate hike is more than just a theoretical possibility in September could prove to be a significant driver (vis-a-vis interest rate differentials) for the greenback.
See the above video for technical considerations in EURUSD, EURAUD, EURGBP, USDJPY, and the USDOLLAR Index.
--- Written by Christopher Vecchio, Currency Strategist
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