• US New Home Sales Rise From a 17 Year Low
• Euro Dollar Falls to a 6 Month Low
• Pound At 13-Month Low After Weak Mortgage Report
• Drop In Stocks And Commodities Keeps Commodity Currencies Under Wraps
• Yen Rises As Risk Carry Interest Diminishes
US New Home Sales Rise From a 17-Year Low
New Home Sales rose 2.4 percent in July after having drop 0.6 percent in June, a modest improvement from nearly a 17 year low. Indeed, one data point does not make a trend and these numbers reflect more short term measures introduced by the Bush administration than real strength in the housing market. Recently, Henry Paulson, the U.S. Secretary of the Treasury, announced a plan to provide liquidity, stability and affordability to the U.S. residential mortgage market. Among those measures was one to increase lending to Freddie Mac and Fannie Mae since many investors argue that these two agencies are just too big to fail. Since then these agencies have been in the market buying mortgages and issuing securities (you can confirm this in the Freddie Mac website). Yet, their investment strategy is not that different from the one taken by Bear Stearns hedge funds before the firm’s collapse. Indeed, Freddie Mac and Fannie Mae are not the solution, they are problem, since their sole existence gives incentives for investors to take more risks that they should. Nothing, even the Federal Reserve is too big to fail, and we may need to see a big blowup before we can say that the housing market has hit the floor. In addition, the Conference Board said on Tuesday that consumer’s confidence jumped to 56.9 from 51.9 in July, the highest level since May, Not surprisingly, the improvement in sentiment coincided with a sharp fall in energy prices. Yet, consumers’ evaluation of their present situation deteriorated further since Americans continue to worry about job security and falling property values.
Euro Dollar Falls To A 6-Month Low
Today, the U.S. dollar climbed to a six month high against the euro on speculation the European Central Bank could have to cut interest rates to prevent the euro zone economy from falling into a deep recession. Indeed, earlier in the day, German’s Federal Statistics Office reported that Europe’s largest economy contracted by 0.5 percent quarter on quarter in the April-June period. Later, the euro dollar broke below 1.46 after the IFO Survey showed that business confidence in German fell to a three year low. Despite the recent easing on energy prices the ECB remains very concerned with inflation but the recent economic data has been so bad that the Governing Council of the ECB could be pressured to review its monetary policy. According to overnight index swaps, traders expect the ECB to cut rates by nearly 50 bps over the next 12 months. On the other hand, the next step by the Federal Reserve policy makers will be to raise interest rates, according to minutes of the Federal Open Market Committee meeting released today. Looking ahead, lower interest rate differentials could make the euro less attractive to foreign investors and the lower level of demand for assets denominated in euros could accelerate the losses in the EUR/USD.
Pound At 13-Month Low After Weak Mortgage Report
With British traders back at their desks after the extended holiday weekend, the market immediately picked back up on yesterday’s GBP/USD spike below 1.85. Without Monday’s swing low below this pivotal level, today’s fundamentals may not have generated enough momentum to push the pair to fresh 13-month lows. However, with the psychological barrier having already lost its luster, event-risk traders were more than ready to put the pound through the ringer again. Adding a fundamental driver to the move this time around, the BBA disappointed MPC members and sterling bulls alike by printing a July loans report that held near its lowest level in a decade. Mortgage approvals for home purchases rose to a 22,448 pace last month, which was better than the revision to the previous month’s reading. However, with loans falling 65 percent year over year and the overall value of the lending dropping to 3.2 billion pounds (the lowest level since 1998) there are no delusions that this is the worst depression in the housing market since the economy’s last recession. However, with all this taken into account, it is arguable that the UK data wasn’t the initial trigger for the GBP/USD’s drop this morning. Indeed, the decline began a full half hour before the housing data crossed the wires. It isn’t a coincident that the pound’s sharp drop against the US dollar began at the same time as the EUR/USD’s plunge this morning. This suggests that the fading growth numbers for German (and more generally the Euro Zone) will exacerbate the slump in the UK as the outlook for exports worsens and lays bare the problems in consumer spending, the housing sector and the financial sector.
High Volatility And Sidelined Commodities Keeps the Comm Bloc In the Red
The commodities market was looking at a relatively quiet day (that is in comparison to the incredible activity of the past few weeks). Crude marked a modest advance while industrial and precious metals fell back. On the whole, this left the Canadian dollar relatively unchanged through the US session close – though this close didn’t fully account for the day’s volatility, including a steep 150 point drop in USD/CAD over just a few hours. Neither the Australian nor New Zealand dollars fared as well. The marked an intraday 11-month low just under 0.85 – though a long-term double bottom and 61.8 percent fib retracement helped put a technical floor in until fundamentals could rekindle bearish momentum. The kiwi held out at 0.69 against its US counterpart, with the help of a hawkish inflation expectations report from the RBNZ for the 3Q. The central bank’s indicator forecasted a 3.0 percent pace of price growth over the coming two years, the highest reading since the first quarter of 1991. And, while this figure won’t change the policy outlook from dovish to hawkish, it may stall further rate cuts for a few months.
Yen Advances As Risk Aversion Weighs On Carry
With an empty economic docket, the Japanese yen was left to exogenous event risk Tuesday. However, it has become blatantly clear in the past year, that scheduled Japanese data hardly registers when compared to the influence risk appetite and aversion has on the carry sensitive currency. Through the day, equities were set to modest advances while bond yields in Europe and the US actually contracted. This left yen traders to speculate on the health of the global credit system which may be looking at another violent contraction depending on whether calls for a major US bank to fail or that the Fannie Mae/Freddie Mac combo will need to be bailed out proves true. Comments in the FOMC minutes didn’t dismiss such a possibility. What’s more, data released today has further shown that banks and thrifts’ second quarter profits were at their lowest levels since 1991, just as the FDIC increased it bank watch list to 117 firms. Conditions certainly don’t look promising for credit and the carry.
Written by Antonio Sousa, Chief Strategist and John Kicklighter, Currency Strategist for DailyFX.com
E-mail: [email protected] and [email protected]