• Ranges extended modestly in EUR/USD and USD/JPY
  • Cable breaks sharply lower only to recoup losses
  • S&P 500 tests 200-day moving average at 886.60, bounces back; closes up on day in late rally
  • ISM non-manufacturing index rises to 47.0 from 44.0
  • EU economics commissioner Almunia: Positive signals for European economy but the situation is still worrisome
  • German finance minister Steinbrueck: Dollar to remain reserve currency; analyze what other countries want to do
  • JP Morgan all industries PMI 48.1 in June from 44.0 in May
  • Canadian official: No mention of reserve currencies in G8 communique, won’t be discussed by leaders
  • Draft of G8 communique leaks
  • Oil unable to reverse losses, closes down $2.60 at $64.10
  • S&P bounces from 200-day average at 886.60; closes at 898.66, up 2.24 pts, on its highs
  • EU’s Juncker: Rising unemployment may lead to civil unrest- Reuters

Another baffling day in the exchange markets. Dealers were buying dollars and selling JPY crosses in droves during the London and early New York sessions, reacting to geopolitical headlines, the disappointingly large budget deficit in India and supportive comments from monetary authorities on the reserve role of the dollar ahead of the G8.

EUR/USD triggered stops below the 1.3900 level and again below 1.3885 but soon bounced from 1.3878 as follow-through was very limited.

USD/JPY and EUR/JPY were belted by model funds again in New York after heavy sales by the same accounts in Asia overnight. USD/JPY cracked support at 94.85/95.00 and fell to 94.67. From there it began a mild rebound but by early afternoon in New York, the short-covering began. Short-term specs were soon scrambling to cover USD/JPY and EUR/JPY shorts. A rebound in US equities from a test of the 200-day moving average in the S&P 500 gave the market added momentum. EUR/JPY rebounded as high as 133.35 in thin afternoon markets.

Helping underpin the reflation rebound was the more upbeat ISM non-manufacturing data and JP Morgan’s composite PMI.

Cable equals carnage. The pound fell through recent rage lows and saw stops triggered in the 1.6250 and 1.6200 areas taking it all the way through 1.6100 briefly. We recouped virtually all the overnight losses, ending at 1.6285.

Let’s call today Head-Fake Monday.