China, Australia to Set the Tone

Solid US data made for a choppy market as traders returned from a long weekend. The Aussie dollar was tops while the Canadian dollar lagged. Australian CPI and the Chinese manufacturing PMI are major events in the hours ahead.  

A measure of G7 FX volatility from JPMorgan fell to the lowest since 2007, in a concrete measure of what many traders are lamenting at the moment. But nothing points to impending volatility like a quiet market. Once complacency give way momentum traders erupt. EUR/USD is particularly quiet with only a 1.25% range in the past two weeks. A hint at change in the BOJ or ECB could get the pair moving.

The market is also looking for a better sense of the strength of the US economy. The April Richmond Fed was at +7 compared to +2 expected. Existing home sales also edged estimates at 4.59m vs 4.56m expected but it was the lowest reading since July 2012.

A WSJ story didn't get the market's attention but it could prove important. Citing sources, it said the BOJ could upgrade its inflation forecast – something that would severely diminish the chance of further easing.

In any case, market are likely headed into a higher gear in the hours ahead with Australian Q1 CPI due at 0130 GMT. The consensus is for a rise to 3.2% on headline inflation and 2.9% on the trimmed mean. A higher or lower reading is sure to jolt AUD.

But the initial move might be restrained by the China PMI from HSBC due 15 minutes later. The preliminary reading is expected to tick higher to 48.3 from 48.0 but remain solidly in contractionary, sub-50 territory.

If both releases point in the same direction, a big move in Australian dollar could be coming.