NOT HOLIDAY TRADE JUST YET - The week is already going to be short with the US holiday, so any expected volatility is going to need to materialize over the coming sessions. Monday price action was a disappointment overall with very little happening, and in the end, it may as well have been a holiday. We did however see a wave of USD selling against most of the major currencies, with notable gains in the Pound, Euro and Franc.
Still, I don't expect any of these gains to be sustained, and believe all of these currencies will soon relent in favor of another meaningful bout of US Dollar appreciation. On the trading side, I remain more focused on the commodity bloc and emerging market currencies, and see some highly compelling technical set-ups that warn of a US Dollar comeback.
KEEP YOUR EYES ON THESE GUYS - Look no further than the New Zealand and Canadian Dollars, both well stretched against the buck and both at levels that would justify a change in appetite. On a macro level, the key markets to watch are USD/JPY and EUR/CHF, with both markets still very much weighed down and slowly approaching support levels that if broken, would almost certainly trigger a mass risk liquidation.
The recent USD/JPY close below the 200-Day SMA for the first time since 2012, and the drop in EUR/CHF back below 1.2150 are red flag signals that market participants should not be as comfortable with risk assets trading where they currently are, specifically, with US equities at record highs.
FED UP - Moving on, I was quite frustrated with Fed WIlliams' comments on Monday. Though it was no surprise to hear such dovishness from the ultra dove, it was hard to swallow nonetheless, given changes in the unemployment rate and inflation that would suggest a move towards reversal, and given recent comments from Fed Bullard, that offered a completely different take on monetary policy, one which was far more hawkish.
So Fed credibility remains a key issue for me right now, and it seems the more guidance and transparency provided, the less we can rely on the central bank for clarity with monetary policy. Looking ahead, the Australian Dollar will likely be busy on Tuesday as market participants digest the most recent RBA policy decision, while in North America, US manufacturing ISM is due. Geopolitical risk should also not be discounted.