The dollar continued to gain ground against most of the majors through Thursday, though it seemed to be picking and choosing its battles. Position squaring before the holiday drains liquidity next week seems to be taken full control of the greenback, with many of the major pair’s most influential anti-dollar trends already marking notable breaks. While the falling USDCHF and rising EURUSD trends, that have defined price action for the past three months, had officially fallen some time ago; GBPUSD made its own monumental break early in the London session. With help from a disappointing UK monetary policy minutes release, the pair dropped below an 18 month rising trendline before going on to slip below the psychologically important 2.0 level (What do you think will happen to GBPUSD? Join the discussion and voice your opinion on the DailyFX Forum). With all of these major trend changes taking hold just as liquidity vanishes, the possibility of sharp volatility over the usually quiet, end of year holiday season is looking greater and greater.
Looking to the economic docket, there were few indicators expected to have any significant impact on the dollar; yet the session proved to find its fundamental winds nonetheless. Housing proved to be the common denominator across the scheduled and unscheduled event risk throughout the day. The usually reported MBA applications report for the week through December 14th marked a 19.5 percent drop in filings – the largest week over week contraction since April of 2004. Taken together with the equally large jump just a few weeks ago, the housing market hasn’t seen this kind of volatility in mortgage filings since the period of considerable fluctuations back in 2003 and 2004. Looking to the breakdown, fillings for purchases dropped 11 percent while those for refinancing plunged 27 percent, both likely reflecting a jump in the rate for the average 30-year fixed rate loan from 6.07 to 6.18 percent through the same period. This rise in lending costs further added pressure to other underlying problems like increased loan restrictions and a glut of inventories. These same problems were showing through the RealtyTrac measure of foreclosures. According to the group’s proprietary data, banks repossessed 68 percent more residences in November than the same period a year ago, though month over month the reading actually eased 10 percent.
While this data was showing hard times behind the US economy, policy officials were forecasting worst ahead. Treasury Secretary Henry Paulson gave his standard, reserved remarks on the economy suggesting growth will continue though there are some “challenges,” like the housing market which he expected to weigh on the economy “for some time.” More candid and pessimistic in his views, Federal Reserve Bank of Richmond President Lacker (a non voter until 2009) said outright that he expects “growth to be very weak for several more months.” Lacker suggested his forecasts come from dour forecasts surrounding the housing market. His forecasts for a 2.0 – 2.25 percent pace of growth through over 2008, belied his expectations for annualized expansion through the fourth quarter to slow dramatically to a 1.0 percent clip from 4.9 percent through Q3.
Looking ahead to tomorrow’s fundamental offerings, there are far more scheduled indicators in the lineup – through their market moving potential is questionable. The final readings on the third quarter GDP numbers could see small modifications, but with most of the data already factored in through the second reading, annualized growth is expected to hold at its four-year high. Later in the morning, the Philadelphia Fed’s factory activity survey fro December is expected slip slightly, a fitting follow up to the Empire disappointment as rising lending costs hit manufacturers. Also, the Leading indicators composite for November – used to forecast growth over the coming three to six months – is expected to hit the wires with a second consecutive decline. Should a negative change be realized it would give considerable credibility to Lacker’s forecasts for growth trends ahead. (If you would like to discuss this article with other traders or John Kicklighter, please visit the DailyFX Forum)
[I]Written By: John Kicklighter, Currency Analyst for DailyFX.[/I]