EUR/USD Could Break 1.3700 If US Housing Data Improves Once Again

[B]AUG 27[/B]
[B]NAR Existing Home Sales (MoM) (JUL) (08:30EST;12:30GMT)[/B]
[B]NAR Existing Home Sales (JUL) (08:30EST;12:30GMT)[/B]
[B]Expected: -0.9%[/B]
[B]Expected: 5.70M[/B]
[B]Previous: -3.8%[/B]
[B]Previous: 5.75M[/B]

[B]How Will The Markets React?[/B]
Event risk on Monday will be contained to US housing data, and the release may only exacerbate current risk aversion trends. The National Association of Realtor?s measure of existing home sales during the month of July is anticipated to have fallen back 0.9 percent to a nearly five-year low of 5.70M. Such a weak figure will not come as much of a shock to the markets, as the dour status of the US housing sector is well known, especially when it comes to the subprime mortgage crisis that has sparked fears of a global liquidity crunch. While Friday?s significantly stronger-than-expected new home sales report for the same month spurred optimism that declining prices are finally bringing homes to a more affordable level, there are other factors to consider. First, new homes only represent a small portion of the housing market as whole, with existing home sales making up 87 percent. Also, this survey looks back to activity that is almost 2 months old, which was well before the current depths of the credit crunch and before standards for getting home financing became much tighter. Finally, new home contractors have far more leeway than individual sellers of previously owned properties to give homebuyers incentives. As a result, we are likely to see sales figures dip again in the coming months, increasing the risks for a disappointing existing home sales report.
[B]Bonds - 10-Year Treasury Note Futures[/B]
According to IFR on Friday, “Today’s options expiration will see the market lose a supportive element starting next week and that should add to the heaviness that has been building over the last couple sessions.” Indeed, the 109-09 March high has held up as strong resistance as 10-year Treasury note futures have slowly eased back, helped by fading risk aversion. If such trends persist, the contract could gradually work back down towards the 105-25 region, though near-term support lies at 108-09 could see Treasuries find a brief bid tone. Event risk on Monday from the NAR existing home sales report has the potential to push Treasuries higher, as a reminder of the dour condition of the housing sector could reignite credit concerns. However, if traders opt to brush off the data, price could continue to ease lower.

As the status of risk aversion remains the primary theme of the forex markets and liquidity crunch jitters subside, the US dollar has suffered quite a bit over the past few days. In fact, EURUSD has already retraced almost 61.8 percent of the plunge from the July 24th high of 1.3855 to the lows established on August 16th. The next level of resistance sits at the confluence of the 8/13 high and the 78.6% fib of 1.3820 - 1.3361 at 1.3713/22. However, EURUSD faces event risk from the NAR existing home sales report, and the pair?s reaction may sound counterintuitive, as stronger-than-expected figure would further assuage credit crunch concerns. Since the US dollar has traded more as a safe-haven asset over the past two weeks, we could actually see an encouraging housing report contribute to dollar weakness. With daily oscillators looking bullish for the pair, the data could lead EURUSD to take on 1.3713/22, and possibly even the record high of 1.3855 once again. However, if existing home sales prove to be very disappointing, equity markets could unravel as risk averse sentiment returns and push EURUSD back down towards 1.3550.

[B]Equities - Dow Jones Industrial Average[/B]
The Dow Jones Industrial Average jumped 1.08 percent on Friday to close at 13,378.87 - just below resistance at a descending trendline at 13,390. Given the Dow?s bounce from support at the 200 SMA, price could be targeting the 76.8% retracement level of the decline from 14,021.95 at 13,666.00, but this will only be possible if credit jitters continue to subside. While US equities face event risk from Monday?s US economic data scheduled to be released, price action in the Dow will likely remain contingent upon volatility and risk aversion trends related to concerns about the liquidity crunch. Nevertheless, a strong existing home sales report would underpin any positive sentiment amongst equity traders. On the other hand, weak housing data could quell market optimism and push the Dow lower, especially if traders become increasingly worried about companies directly involved with the housing sector.