Talking Points:

  • Global monetary policy was shaken this past week with the Dollar leading the way, but the risk connection remains key
  • With the list of high profile events short this week, the markets may seek to maximize the typical June trade activity
  • Top event risk ahead includes RBNZ rate decision, credit ratings, PMIs, Fed speak and themes like political risk

Retail speculators are rapidly building up their long exposure in Oil with support currently under pressure. How are they positioning in the S&P 500, FTSE100, EUR/USD and other benchmark? Check the DailyFX Sentiment page to see.

We have seen the global markets charged this past week by a general shift in monetary policy driven by the Federal Reserve's decision to start working off its large balance sheet. The implications are broad and deep, though they don't necessarily have to be immediate. We still find the sluggishness of complacency bogging speculative moves down. And, moving forward, the convergence of seasonal quiet with systemic anesthesia will put investors' expectations to the test. Historically, June is the quietest month of the calendar year for the S&P 500. For more immediate consideration, the docket significantly throttles down on the top tier event risk that we would expect to ignite an elemental theme. The points of escalation are wells deep with potential - monetary policy trends, geopolitical risks, protectionism and the speculative tide itself. However, the market has proven itself tolerant of - or perhaps oblivious to - the developments to this point. Thinned liquidity during holiday conditions may render these explosives even more inert.

Given the market conditions we find ourselves in, the Dollar carries some of the best potential for activity and trend development into the coming week. The Federal Reserve's announcement that it was pushing forward with policy normalization - with plans to work down its balance sheet alongside measured rate hikes - generates greater competitive contrast amongst the major currencies while also altering the balance of global exposure. As the most stoic and deep-pocketed source of funds announcing it would slowly withdrawal from the market, the finicky and volatile speculative rank are facing greater responsibility for dictating direction and activity levels for the financial markets. The implications for global equities, emerging markets and other markets dependent on these free-flowing capital are clear. Yet, in the absence of self-actualization, we still have the slow burn for the Greenback. The DXY Dollar Index's post FOMC bounce from collective support this past week settled through Friday with retracements to EUR/USD resistance and USD/CAD support. These may prove stepping stones to more productive moves over time.

In fundamental contrast to the Dollar, the Japanese Yen was positioned as the extreme juxtaposition for monetary policy vowing to maintain its extreme, annual stimulus target. This major central bank is increasingly the last vestige for the concept of 'QE infinity,' and therefore should be monitored for its effectiveness in maintaining the stability afforded through policy support. Another theme that could readily charge the market from a cold start is political risk - both localized or international. The US in particular poses a significant threat on this front with the reports of investigation into obstruction and the ongoing war of words it has volleyed with trade partners. For scheduled event risk, the RBNZ will be the high profile monetary policy event - but one that has a penchant for delivering surprise. The European leaders' summit is likely to cover critical topics but the high profile threats have cooled recently. Global PMI figures, Fed speak and some key credit ratings (US, Greece and Germany in particular) should be flagged on calendars. But the primary hurdle for traders is overcoming assumed seasonality. We discuss trading into the new week in today's Trading Video.

Dollar's Fledgling Bull Trend to be Tested, VIX Faces Summer LullDollar's Fledgling Bull Trend to be Tested, VIX Faces Summer Lull

To receive John’s analysis directly via email, please SIGN UP HERE