Dollar Declines As Housing Outlook Worsens

The loose thread from last week’s solidly packed economic calendar, Monday’s new home sales report tipped the scales for fundamentalists torn between strong lagging indicators and a distinct cooling in more timely reports.

After the worse-than-expected number hit the wires, the dollar cut its two session advance short with big moves across the majors. For EURUSD, the data was met with a 70-point rally to a 1.3350 high that was 100 points off of overnight lows. In a more intense dollar move, USDCHF slid 85 points in 30 minutes to test key support around 1.2120/10. Making a technical move of its own, GBPUSD extended a rally that began in the London session for a 140-point climb to mark a double top with Thursday’s high at 1.9725. Finally, USDJPY continues to carve out a convincing ascending triangle following a test high around 118.45 and a subsequent turn around 117.65.

After the last US economic indicator ran across the wires last Friday, market participants were left hanging on their valuations of the housing market. On the one hand, the somewhat-dated February housing starts and existing home sales numbers painted a promising picture for building and buying activity in the early months of the new year. Housing starts outpaced expectations of a modest pick up with a 9 percent jump in construction projects to a 1.525 million-unit pace. The cliff hanger though was the 3.9 percent jump in existing home sales on Friday, the biggest in three years. On the other hand, the industry confidence NAHB index, weekly mortgage applications and February building permits reports dulled the more imperative outlook. Today’s February new home sales report from the Commerce Department was likely the key as it combines the desirable qualities of being a leading indicator and a trustworthy sales report.

Accordingly, sales of new residences eased 3.9 percent, following the massive 15.8 percent drop in January. Taking the two monthly declines into account, activity was led to an 848,000-unit pace of sales – the weakest in seven years. Beyond the obvious reasoning of an overall cooling housing market, February sales activity was depressed by weather and consumer sentiment. Unusually cold and wet conditions last month kept many buyers away from the market – evidenced specifically by the 26.8 percent drop in purchases in the North East and 20 percent decline in the Midwest. Also, many Americans coming to the market may have deferred their purchases too allow prices to soften further. In February, the average closing price fell 0.3 percent to $250,000. This seems to be a reasonably strategy since inventories of unsold homes has just climbed to its highest level in 16 years – and that does not include cancellations. Already looking ahead, existing sales and housing starts are expected to follow suit with the leading indicators as the sub-prime credit crunch weighs on mortgages defaults and approvals. With this data in mind, many economists who had projected a turn in the housing slump in the coming quarter or slightly further in the year are now revising their predictions for the worse. Traders now look ahead to tomorrow’s consumer confidence report for March to interpret how hard mortgage defaults and the stock market correction has hit the average American’s level of optimism.

Starting the session rather slowly, the bears really picked up steam in the equities market after the poor housing data. By 15:41 GMT, the Dow led the pack with a 0.63 percent drop to 12,401.78. Not far behind, the S&P 500 was off 0.53 percent at 1,428.57 and the NASDAQ Composite slipped 0.48 percent to 2,437.15. Offering a direct correlation to the macro data for the day, KB Home shares lost 2.4 percent or $1.11 in value to move to 45.75 following the sales report. In merger news, Beckman Coulter announced its intentions to buy medical-diagnostics firm Biosite for $1.55 billion, or $85 per share. In response to the deal shares of Biosite surged $28.40 or 51.3 percent to $83.78, while those of Beckman slipped 7.8% to $61.87.
Treasuries found a modest bid on the poor economic data for the day. The ten-year note rose 9/32nds to 100-12 by 15:40 GMT as its yields lost 4 basis points to 4.575. Thirty-year T-Bonds rose 15/32nds as yields backed off 3 basis points to 4.772.