THREE CHARTS TO START YOUR WEEK

CURRENCIES

The U.S. dollar has lost much of its safe-haven status during the past month, but choppy markets lie ahead as investors swing into and out of the greenback, said Avery Shenfeld and Krishen Rangasamy, economists with CIBC World Markets Inc.

The recent rally in the euro against the greenback reflects the easing of the panic over the sovereign debt crisis and buoyant economic news out of Europe.

"In essence, we are seeing a see-saw market that punishes the currency for the region seen in most immediate trouble, a trend that could well persist through 2011 in what will be a slow growth environment on both sides of the Atlantic," they said in a report to clients.

But now there is a chance "for a short-lived turn back to the dollar" as improved auto production and healthy capital goods orders delay serious signs of a U.S. slowdown until the fourth quarter, and that could give the dollar a lift in the third quarter, Mr. Rangasamy said.

However, the U.S. dollar could come under renewed long-term pressure in 2011 as a result of weak economic data and disappointing growth in late 2010, he said. Additional downward pressure could be exerted on the greenback as a result of continuing deflation concerns, which will keep the U.S. Federal Reserve Board from raising regulated interest rates until 2012.

While the short-term outlook for the greenback is positive, it is also positive for the Canadian dollar. The loonie could put on a rally this year to almost parity with the U.S. dollar if the Bank of Canada continues to raise interest rates as we expect, Mr. Rangasamy said. "The markets are not pricing in rate hikes in Canada," he said.

COMMODITIES

Is the bull market in gold bullion that began in October of 2008 breaking down?

The spot price of gold reached a record high of $1,265.30 (U.S.) an ounce on June 21, 2010, up from a low of $682.41 on Oct. 24, 2008, according to Bloomberg data. It closed late last week at $1,181.50.

"The uptrend has been broken," said Bob Tebbutt, vice-president of corporate risk management for Peregrine Financial Group Canada Inc. "It could mean important things or it could mean nothing - just a minor breakdown."

The big drawback for gold is the perception among investors that deflation is the key risk, not inflation, Mr. Tebbutt said. But, Mr. Tebbutt believes that deflation worries will prove to be temporary and, once unleashed, the money in the system will spark rising prices. "The stimulus funds are being held by the [U.S.] banks and are not flowing," he said. "Corporations have been hoarding money and they are not investing."

However, there are indications this is beginning to change. "The cash balances held by corporations are starting to come out," he said.

Investors should keep a close eye on gold price moves. The metal looks set to test its 200-day moving average support level of around $1,149, said Michael Hewson, a market analyst with CMC Markets UK PLC, an online derivatives trading company. "A close below this key level could well trigger further losses toward $1,032 in the short-term."

"This is the first meaningful correction since the high," said gold bull John Ing, president of Maison Placements Canada Inc. The surge to the record high did not have enough steam to reach the $1,350 price level, which is the target of many technicians.

Mr. Ing thinks inflation remains a risk. "Deflation does not happen when there's lots of liquidity."

BONDS

Banks in Europe and the U.S. have passed their bank stress tests, but they are still cutting back on their lending.

Investors have given the thumbs-up to the stress tests, pushing the bank credit default swap spreads lower, although a debate continues as to their credibility.

Credit default swaps are basically insurance on bank bonds and a lower rate implies a cheaper cost of borrowing by the banks. That's the good news in the fixed-income market and indicates investors are confident about bank balance sheets.

But the lack of bank lending remains a problem. "Any debate about stress test modelling diverts attention from the much more serious problem of dysfunctional credit creation," said Michael Gregory and Benjamin Reitzes, economists with BMO Nesbitt Burns Inc. in a report to clients. "If European regulators were hoping that their stress tests would stoke bank credit growth, the U.S. experience would suggest otherwise."

In the U.S., bank credit continues to contract except for loans to the largest corporations, while loan demand is shrinking. In Europe, bank lending to households has increased, although it remains modest in its lowest range since the early 1980s.

When will turn things around?

"We are already moving in a direction that banks are getting a much better sense of their global capital requirements," Mr. Gregory said. "We are probably quarters away, not years away before that happens."

As for loan demand, that all depends on job growth. Over time, productivity and business spending data all suggest improved job growth could happen before long, Mr. Gregory said. "Probably within four to six months as we get into October and the dust settles, we will have a better idea where we stand."