Dollar Dilemma on Inevitable Mixed Signals from Fed

The US dollar struggled for direction Monday with bonds and stocks volatile. The Australian dollar was the best performer while its Canadian cousin lagged. The Asian calendar is light but all eyes will be on delicate stock markets in China and Japan. Premium trades currently in progress are 2 shorts in AUDUSD, 3 longs in USDCHF and 1 long in GBPUSD. The technical and fundamental arguments are laid out for each of the trades, with recent emphasis on the USDCHF trades in the latest Premium Insights. 

Bonds and stocks were hit by a wave of forced liquidation to start the week as hedge fund investors rush to the exits. The S&P 500 fell more than 30 points at the lows and US 10-year yields jumped 12 basis points to 2.66%.

The FX market was unsure of how to respond to the declines. The Australian dollar had tumbled as low 0.9148 in early European trading on the rout in Shanghai stocks but it slowly recovered and then took off to 0.9299.

The euro was caught in a brutal 40-pip chop in early US trading, bouncing between 1.3100 and 1.3060 a dozen times. Eventually, the dollar bears won a small victory as pairs climbed higher.

The market was looking for clarity from the Fed comments from Dudley and Kocherlakota were scrutinized. The NY Fed published comments Dudley made at a weekend meeting. The first headlines were comments saying monetary policy can't work with financial instability. The knee-jerk reaction was to sell the dollar and buy risk trades but a closer look at the speech showed he was talking about something like the 2008 crisis, not the type of instability in current markets.

Kocherlakota criticized the Fed's forward guidance on interest rates (but not tapering). He took the unusual step of releasing a statement, which is usually a sign of displeasure with markets but he then said the market reaction was 'not a cause for concern.'

The moves on the day left market participants unsure of what to do next. The slate of Fed speakers continues throughout the week.

The calendar is light in Asia with Japan's May corporate service price index at 1950 GMT. It's expected to be flat year-over-year. The focus will be on Chinese stocks after a 5.3% fall on Monday. Indications are for a moderate 2-3% bounce.