Euro At Another All Time High, Pound Pummeled by Bad Housing Data

The EURUSD hit yet another all time high printing 1.3911 in Asian trade but once again the follow through was limited.

[B][U]Talking Points[/U][/B]

  • Japanese Yen: weaker in wake of political uncertainty after Abe
  • Euro: Another all time high
  • Pound: RICS goes negative shocks pound bulls
  • Dollar: only weekly jobless on tap
    The EURUSD hit yet another all time high printing 1.3911 in Asian trade but once again the follow through was limited. The markets remain in a state of flux, ahead of tomorrow US retail Sales numbers which will help to quantify the extend of US economic slowdown. At this point the currency market is operating under the assumption that the Fed will cut 26bp at next week?s FOMC meeting while the ECB may raise rates another 25bp in October, which explains EURUSD recent strength. However, those assumptions are far from ironclad and depend to a great extent on the degree that the collapse of housing has affected overall US consumer demand. If Retail Sales are soft tomorrow that may serve as the nail in the coffin to any dollar bull argument that US economy remains vibrant. Given last week?s horrid NFP results, market talk will turn to a possible 50bp cut and EURUSD will likely take out the 1.4000 figure. However, should the retail data prove positive it may act as a backstop to any further dollar deterioration as it will offer strong evidence that at least for now the weakness in housing remains contained.
    Meanwhile in UK, pound longs received a shock when the RICS survey registered a negative reading for the first time in two years printing at -1.8 vs. 10.0 expected. This was the first sign of weakness in the UK housing market and severely lowers chances of another rate hike to 6% by year end. The UK economy continues to perform admirably in the wake of all the turmoil in global credit markets but its growth may have peaked and if housing- which has been the lynchpin of UK inflation - begins to recede from it highs the BOE is much more likely to remain stationary for the rest of the year.
    Finally the USDJPY firmed in early European trade testing the 114.50 level as Japan continues to be plagued by political uncertainty in the aftermath of Abe?s resignation. Furthermore, Bloomberg reported that $21 Billion of Japanese mutual funds were launched in September focused on making overseas investments. Japanese retail investors remain the biggest proponents of the carry trade, seeing little value in their own currency and that attitude should continue to weigh on the yen unless risk aversion returns to the market.