July is a very unique month in the currency market because not only do we have strong cases of Seasonality, but it also happens to be the worst performing month for certain currencies. Take a look at Which Currency Pairs Perform the Worst in the Month of July?

However, here is another correlation that you may find interesting. USD/CAD has a nice positive relationship with the energy sector ETF which makes logical sense. So if you are trading USD/CAD, make sure you keep an eye on the ETF for any anomalies.

We have a nice upside breakout in GBP/JPY this morning that has been driven by the strong rally in equities.

Tomorrow is also the end of the month, quarter and half year which means that fixing flows could lead erratic intraday activity over the next 24 hours. Typically fixing flows are partially based upon relative performance of stock markets over the past month, but because tomorrow is the month and quarter end, we could see divergent buying patterns by fund managers. This is because on a monthly basis, the S&P 500 outperformed the German DAX and U.K. FTSE but underperformed the Nikkei. On a quarterly basis however it underperformed the DAX and Nikkei but outperformed the FTSE. If the month and quarter to date performance were in line directionally, the fixing flows would be easier to predict.

However U.K. stock markets have dramatically underperformed Japanese equities which should pave for GBP/JPY buying over the next 24 hours. First quarter GDP revisions and the current account balance are also due for release tomorrow. The trade deficit narrowed in the first 3 months of the year, which means that the current account deficit should have narrowed.

Technicals, fundamentals and flow point to the strong potential for further gains in GBP/JPY

From the Weekly Standard

The Dollar’s New Best Friend
Beijing warms up to the greenback–because it has to.
by Gordon G. Chang

Last Tuesday, Brazil, Russia, India, and China–the so-called BRIC nations–met in Yekaterinburg, Russia, for what was supposed to be an anti-American gabfest. The main agenda item for the first formal meeting of the four largest developing economies was the future of the dollar. In recent months, Beijing and Moscow have led a global charge against the greenback, and Brasilia has been a willing co-conspirator in the effort. The BRIC post-summit communiqué referred to the world’s currency problems but, to the surprise of observers, did not attack the dollar head on.

The Chinese government in the last few weeks seems to have radically changed its tune on this issue. In March, Zhou Xiaochuan, the head of China’s central bank, called for the replacement of the dollar as the world’s reserve currency in a widely reported text released to the public. In May, however, Beijing officials took a different tack, going out of their way to talk about the dollar’s unique status.

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Although this is a big story, central bank intervention is the big focus this morning. The Swiss National Bank is at it again! They have sold Swiss Francs aggressively, driving EUR/CHF and USD/CHF up more than 1 percent. Last week, I talked about how a move down to 1.50 creates a good risk / reward opportunity. EUR/CHF fell to 1.5007 last night, which probably triggered alarm bells at the SNB.

Here is a chart of the move in EUR/CHF this morning. On FX360, I posted a more thorough analysis as well as charts from previous SNB interventions.

Five factors:

1. U.S. Treasury Auction

One of the big focuses of foreign exchange traders this week is the massive Treasury auction. The U.S. government will be issuing a record $104 billion of 2 year, 5 year and 7 year Treasury notes between Tuesday and Thursday. The reason why currency traders are watching these auctions is because of its scale and also because it will shed some light on investor’s willingness to fund the U.S.’ large and growing budget deficit. The auctions will be a big hurdle for the U.S. dollar this week because if demand comes up short, the dollar could get hit but it is not that simple because at the same time, weak demand could drive up yields, which is dollar positive. Either way, over the next couple of days, there will be a lot of focus on the Treasury auctions.

2. First ever 12 month ECB refinancing

The ECB refinancing is the biggest story for the EUR/USD this week because the 12 month offer is seen by bond traders as a quasi quantitative easing effort by the ECB because the operations are most likely going to be collateralized by government bonds which can then be posted as collateral to the ECB for funding. Although ECB President Trichet warned that their monetary policy actions can be easily unwound if needed, he also said that policy makers must remain alert despite signs that the slump is decelerating because “there are still risks of a sudden emergence of unexpected financial turbulence.”

3. Fears that German Debt Could Explode

As for Germany, Deputy Finance Minister Werner Gatzer said that total new debt could exceed EUR100 billion next year, which would be much larger than this year’s record financing needs of EUR80 billion. Looking ahead, we could see further weakness in the EUR/USD if Tuesday’s PMI figures fall short of expectations. Despite the improvement in business confidence, which was driven entirely by the expectations component of the report, current conditions remain weak.

4. Comments from ECB President Trichet

Although ECB President Trichet warned that their monetary policy actions can be easily unwound if needed, he also said that policy makers must remain alert despite signs that the slump is decelerating because “there are still risks of a sudden emergence of unexpected financial turbulence.” These bearish comments came after ECB member Nowotny said this morning that interest rates could remain unchanged into 2010.

5. Tuesday’s PMI numbers

However in the near term, weaker economic data could keep the EUR/USD pressured. German industrial production, factory orders and retail sales have all declined which could prevent a meaningful pickup and possibly even deterioration in manufacturing and service sector PMI.