The snapback in the Dow Jones Industrial Average today was nothing short of impressive. Having been down over 100 points yesterday, the Dow slid...

... another 86 points at the onset of US trading.

Fortunes were reversed however as the Dow rebounded just as quickly as it fell.
Yields suffered the same fate as they sold off sharply ahead of the US
equity market open but rebounded shortly afterwards. The US dollar was
the only asset that refused to fall. In fact, the biggest loss that we
saw in the US Dollar against the Japanese Yen over the past 24 hours was
a modest 20 point drop. The Euro on the other hand remained trapped
within a 30 point trading range throughout the day. Although the rise
in bond yields as well as the jump in the Philadelphia Fed index could
be credited for taking the dollar and the Dow higher, the markets
feel-good factor is primarily keeping risk appetite high. The US
economy faces problems from the fallout of the Bear Sterns hedge funds,
but with no new bailouts surfacing the market is hoping that this is an
isolated incident. Whether or not this is true remains to be seen.
Like the Empire State manufacturing survey, the Philly Fed index jumped
to a 2 year high in the month of June. The rise was driven almost
exclusively by an increase in new orders since both the employment and
prices paid components dropped. Underlying weakness capped any major
movements in the dollar despite the magnitude of the surprise. Trading
should continue to remain quiet over the next 24 hours with no US data
due for release. This type of market has been perfect for range
traders.

USD/JPY Hits New 4 Year High

Unsurprisingly the fact that the Dow failed to slide for another day
has led to a rebound in carry trades. Yen weakness remains the
predominant theme in the markets which indicates that risk seeking
appetite remains high. In fact, the appetite is so strong that USD/JPY
hit a fresh 4 year high today while AUD/JPY reached a new 15 year high.
Part of the weakness in the Yen can be attributed to the smaller than
expected trade surplus in the month of May. Even though the Yen was
weak, the drop in the US dollar reduced the countrys demand for
Japanese exports. Each piece of disappointing economic data only
further postpones the Bank of Japans next interest rate hike. Like
the US, there is no economic data from Japan until next week, when the
Japanese economic calendar picks up significantly. Therefore carry
trades will continue to be at whim of the US equity markets. Do not
underestimate the power of the carry; it will only die when the rally in
the Dow comes to an end.

Euro: Becoming the Perfect Currency for Range Traders

Range traders should be having a ball with the Euro as the currency
pair oscillates within a 30 pip range throughout the US session. Range
trading has been fueled by mixed economic data that gives little insight
into when the European Central Bank may raise interest rates next. Both
the PMI manufacturing and service reports accelerated in the month of
June, but French and Italian consumer spending both took a nosedive last
month. All three of the main Eurozone nations have now reported a
deceleration in consumer spending which is not good for the regions
overall economic outlook. The PMI reports are conflicting and confusing
which makes it difficult to tell which direction the German IFO report
will sway tomorrow. The market is currently looking for business
sentiment to remain unchanged at 108.6. With the dip in the German ZEW
index earlier this month, the odds are slightly skewed to the downside.
Meanwhile over in the Switzerland, the trade surplus increased last
month thanks to the weakness of the Swiss franc. The currencys
refusal to rise will continue to provide stimulus for the overall
economy.

Stronger Economic Data Keeps British Pound Steady Against the Dollar

Among the majors, the British Pound held up the best against the US
dollar thanks to continued optimism about further interest rate hikes
and stronger economic data. CBI industrial orders accelerated in the
month of June, indicating that the strength of the British pound is not
holding back overall demand. This of course supports the potential for
6 percent interest rates by the end of the year which explains why the
British pound has outperformed the Euro for the last 4 trading days.
Bank of England Governor King also confirmed the central banks
intentions to tackle inflation aggressively. He indicated that the MPC
is determined to bring inflation back to target. As we all know, the
MPCs primary tool to achieve that is the lending rate. Although the
GBP/USD is stalling, another stab at 2.0 is very likely. There is no
economic data due for release tomorrow.

New Zealand dollar Trading Back Near Pre Intervention Levels

It seems that fading intervention is the markets best bet as the
initiatives taken by the Reserve Bank of New Zealand has done little to
stem the currencys rise. In fact the New Zealand dollar is now
trading back near pre-intervention levels. The central bank is
certainly not going to be happy about this, which raises the possibility
of further intervention. However, be forewarned as the RBNZs
intervention war chest remains very small. The Australian dollar is
higher as well, which indicates that the markets demand for the high
yield currencies is robust. The Canadian dollar on the hand sold off
significantly. Retail sales increased a paltry 0.4 percent in the month
of April. Excluding automobiles, sales were flat that month. This puts
an end to the strong trend of consumer spending that we have seen over
the past few months as well as the downtrend in USD/CAD, at least for
the time being. Even though high energy prices, poor weather, and an
early Easter are all to blame, the bottom line is that we are beginning
to see serious holes or weakness in the Canadian economic growth story.



By DailyFX
DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com


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