Market Drivers June 04, 2015

EUR Pops 1.1300 as Bund yields approach 1%
AU posts worst trade deficit ever
Nikkei 0.07% Europe -1.59%
Oil $59/bbl
Gold $1182/oz.

Europe and Asia:
AUD Trade Balance -3.89 vs. -2.17B
AUD Retail Sales 0.0% vs. 0.4%

North America:
USD Weekly Jobless 08:30

CAD Ivey 10:00

Another night of insane volatility in the EUR/USD as the pair squeezed shorts mercilessly soaring through the 1.1300 level to hit a high of 1.1380 before finally finding some pause in mid morning European dealing.

This round of buying was caused by the spike in Bund yields which popped to come within a whisker of the 1% level as the bond rout in European fixed income markets continued. Yesterday during the ECB presser President Draghi noted that fixed income markets could become much more volatile given the very low yield levels.

This is perhaps the unintended consequence of the ECB QE program. Policymakers have been lulled by the assumption that QE serves as a vol dampening blanket over the capital markets, but that was only true under the US experiment which was first to try the unconventional measures.

With ECB now the last major central bank to employ QE the markets moved way ahead of policymakers and bid the bunds down to virtually zero yields even before the ECB could put its program in place.The end result is that EZ fixed income markets have now become massively more volatile and that volatility contagion has spread to FX.

The euro has now risen 500 points in just 48 hours and this type of volatility could continue for a while as fixed income markets find an equilibrium. The price action is sure to make an impression on policymakers on this side of the Atlantic as well as Ms. Yellen and company carefully consider the consequences of rate hikes. The Fed is loathe to create any unnecessary volatility and may decide to err on the side of caution hiking rates later than expected.

With no major data releases on the docket today the markets are likely to remain focused on the EZ fixed income markets with euro longs sure to press the 1.1400 barrier and even eye the key 1.1500 level over the next few days as the short squeeze in the pair remains relentless.

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