FX: Watch Euro and Emerging Market Currencies

Early gains in the U.S. dollar were erased after the release of weaker than expected durable goods orders. The last unofficial week of summer is generally expected to be a quiet one and the market's outsized reaction to durable goods may be a sign that this is true. However with a heightened focus on Fed tapering, a busy Eurozone economic calendar and over active emerging market central banks, traders should always be prepared for the possibility of big swings in the forex market.

The only piece of economic data released from North America today was durable goods and unfortunately orders fell 7.3% in the month of July, a sign that manufacturing activity could be weakening. Economists had been looking for only a 4% drop but aircraft orders dragged the overall index lower, causing the dollar to sell off slightly on the report. Excluding transportation, durable goods fell 0.6% as demand for computer and electronics weakened.

Meanwhile the euro is shrugging off the 2% slide in Italian stocks and concerns that Greece could need another round of aid. Silvio Berlusconi is no longer leading the government but he continues to cause havoc for the markets. Members of his centre-right Freedom Party threatened to bring down the government by calling early elections if Berlusconi is pushed out of parliament after being convicted of tax fraud. The vote on evicting him from the government is scheduled for October. If new elections are held, there may be no majority government and that could mean a complete standstill for fiscal reforms in Italy. Aside from stocks, Italian bonds also moved sharply lower, driving 10 year yields up 7bp.

As for Greece, German Finance Minister Schaeuble said on Sunday that debate about a new debt cut prompted him to say that the country will need further aid. German Chancellor Merkel agrees that a debt cut would be dangerous and could potentially unsettle the market. Greece on the other hand continues to deny that debt levels are a concern while ECB Board Member Asmussen called on Greece to press ahead with reforms despite the pain.

More Action Expected from Emerging Market Central Banks

Emerging market currencies were a big focus last week with Brazil launching a $60B currency intervention plan, Indonesia rolling out a package of reforms to stabilize their currency and fix their current account deficit and India verbally intervening in the Rupee. Central banks in emerging market nations have been overly active because their currencies have been weakening rapidly. A lack of confidence by investors and a rising U.S. dollar has put significant pressure on currencies around the world particularly in countries where the current account deficit is extremely high. Unfortunately the problems don't end with the Turkish Lira dropping to a record low this morning. The central bank attempted to calm the markets by conducting a $350 forex auction. Emerging market central banks are fighting an uphill battle and the results of their efforts have been limited because intervention rarely works. For example the Indian Rupee completely erased Friday losses while the Indonesia Rupiah holds near its lows. As a result, central banks still need to do more which is why Brazil is widely expected to follow their intervention announcement with a 50bp rate hike this week.