Soaring Euro Volatility

Euro volatility posted its highest rise since the Brexit vote as the 1st round of French Elections approached with fears that Le Pen and Melenchon will qualify for the final round. The push-and-pull of economic data against government talk was at work on Monday. The pound was the top performer while the yen lagged. Aussie is the biggest loser after the RBA minutes raised emphasis on mounting risks in the housing market. More on managing euro volatility, FX trades and metals positioning in the Premium video below.

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USD/JPY has been on the defensive for the past month and after Friday's soft CPI and retail sales data it slumped again. But despite tough talk on North Korea and more soft data on Monday, the pair found support just ahead of the 61.8% retracement of the post-election rally.

The Empire Fed was at +5.2 compared to +15.0 expected and the NAHB housing market index at 68 compared to the 70 consensus. But the market was more interested in what was happening at the White House than the statistics office.

Treasury Secretary Mnuchin stressed the long term benefits of a strong dollar and said he still expects a tax reform deal in 2017. That helped lift the US dollar to 109.10 from 108.55. The dollar strength was broad and the S&P 500 gained 20 points to erase most of last week's decline.

Time and time again this theme has played out but the returns are diminishing. Trump set the dollar and stocks on fire early in the year when he promised a 'phenomenal' tax plan in a few weeks. A huge tax cut is something the market can patiently await but eventually the White House and Congress will need to deliver.

In the meantime, the shape of the data-vs-policy trade is clear: Tentatively sell the dollar on soft numbers but clear out when the spending, deregulation, tax cuts or stimulus talk starts.

In the bigger picture, the reflation story is losing momentum and that's something we will write more about it the days ahead.

In the short-term, the Australian dollar is back in focus with the April RBA meeting minutes due. AUD/USD has made false breaks on either side of the Feb-March range recently and with no bias from Lowe, the bias is muddled.