US Dollar Down as US Housing Starts, Building Permits Plunge to Record Lows

• US Dollar Down as US Housing Starts, Building Permits Plunge to Record Lows
• Japanese Yen Down as FX Carry Trades Gain - Watch for Japanese GDP Overnight
• Euro, British Pound Pause Below Key Resistance – GBP/USD Faces BOE Meeting Minutes on Wednesday
• Canadian Dollar Gains Ahead of Upcoming Canadian CPI Report

US Dollar Down as US Housing Starts, Building Permits Plunge to Record Lows
The US dollar was the biggest loser on Tuesday as US housing data proved to be very disappointing. The Commerce Department reported that housing starts plunged by 12.8 percent during the month of April, and a whopping 54.2 percent from a year earlier, to a record low annual pace of 458,000. Likewise, new building permits slumped 3.3 percent in April, and 50.2 percent from a year earlier, to 494,000.

The main event risk for the US dollar on Wednesday will be the release of the minutes from the Federal Reserve’s last meeting on April 29. Following that meeting, the markets saw no surprises from the Federal Open Market Committee (FOMC), as they left the fed funds target range at 0.0 percent - 0.25 percent and said that “conditions are likely to warrant exceptionally low levels…for an extended period.” Furthermore, the FOMC reiterated measures first announced in March, when they said they would still purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, as well as $300 billion of Treasury securities by autumn. However, there were tinges of optimism within the policy statement as the FOMC qualified their initial, repeated remark that data indicates that the economic contraction has continued by adding that “the pace of contraction appears to be somewhat slower.”

Since this information has already been revealed, the release of the minutes may not be very market-moving. The one thing that may capture the market’s attention, though, is the FOMC’s long-run projections for growth, unemployment, and inflation as revisions that indicate that the outlook appears to be even worse than previously anticipated could hurt risk appetite throughout the financial markets, and thus lift safe-haven currencies like the US dollar. However, if the revisions improve, FX carry trades could surge and punish the greenback.

Japanese Yen Down as FX Carry Trades Gain - Watch for Japanese GDP Overnight
The Japanese yen fell against most of the majors on a day that FX carry trades continued to make headway. The status of the correlation between the JPY crosses and equities could be tested tonight, though, when Japan’s Cabinet Office will release preliminary growth readings. After three consecutive quarters of contraction, the outlook doesn’t look good. There are signs that businesses are suffering considerably at the hands of waning domestic and foreign demand. Consumers have very little to work with these days, as the jobless rate has slowly climbed to a nearly five-year high, and perhaps even worse, cash earnings growth contracted by 3.7 percent in March from a year earlier, the sharpest drop since 2002. Meanwhile, Japanese exporters have had to grapple with not only slowing global growth, but also the appreciation of the Japanese yen, all of which has led foreign-bound shipments to tumble a whopping 46.5 percent in March from a year ago, according to figures published by the Ministry of Finance. As a result, a Bloomberg News poll of economists shows expectations for GDP to fall 4.3 percent in Q1, with the annualized rate forecasted to plummet by a record 16.1 percent.

Euro, British Pound Pause Below Key Resistance – GBP/USD Faces BOE Meeting Minutes on Wednesday
The euro and British pound both gained against the US dollar, but EUR/USD was ultimately unable to break above the May 14 high of 1.3667 and GBP/USD backed down from the upper end of a channel formation at 1.5525 that has contained price since late April. There were a variety of reports from both the Euro-zone and the UK, though none proved to be highly market-moving. German investor sentiment continued to reflect divergent views on current conditions and the economic outlook in May. Indeed, the ZEW survey on investor confidence in the current situation slipped to -91.3, the lowest since July 2003, from -91.6 while the expectations component surged to a nearly 3-year high of 31.1 from 13.0.

UK inflation data was all-around weaker than anticipated, as the headline consumer price index (CPI) rose 0.2 percent during the month of April (0.4 percent expected) while the annualized rate of growth slowed to a 15-month low of 2.3 percent (2.4 percent expected) from 2.9 percent. Meanwhile, the retail price index (RPI), rose a slight 0.1 percent (0.2 percent expected), allowing the annualized rate to plunge to a record low of -1.2 percent (-1.1 percent) from -0.4 percent. In the end, the decline in headline rates of inflation leaves CPI closer to the Bank of England’s 2 percent target, but with RPI falling rapidly, the central bank may become increasingly concerned about deflation risks and thus, there is potential that they will consider expanding their quantitative easing program.

Looking ahead to Wednesday, the minutes from the Bank of England’s May 7 meeting may not be as market-moving as they’ve been in the past, as there has already been significant detail revealed about the mindset of the Monetary Policy Committee (MPC). Indeed, we already know that the BOE has decided to expand their quantitative easing program by 50 billion pounds to 125 billion pounds, that the drop in Q1 GDP of -1.9 percent was worse than expected, and that CPI will likely will be below the BOE’s 2 percent inflation target in the medium term. However, the growth and inflation outlook published in the BOE’s Quarterly Inflation Report suggests that the central bank may be open to expanding their quantitative easing program later on. If the minutes from the BOE’s most recent meeting reiterate this, the British pound could pull back very sharply.

Canadian Dollar Gains Ahead of Upcoming Canadian CPI Report
USD/CAD fell further on Tuesday thanks to broad US dollar declines, leaving the pair within a range of 1.1500 - 1.1800. FXCM SSI, a contrarian indicator, shows that traders remain net long the pair by 1.87:1, suggesting we could see additional declines in the near term. However, USD/CAD faces high event risk on Wednesday. According to the Bank of Canada’s last Monetary Policy Report in April, the Bank is open to quantitative easing (QE) and credit easing if nominal interest rates start to fall below zero. Indeed, the Bank stated that while they could cut rates to zero in theory, it would ultimately “eliminate the incentive for lenders and borrowers to transact in markets, especially in the repo market.” As a result, inflation reports will be key to gauging whether the Bank of Canada will go the route of QE, but looking ahead to upcoming reports, this shouldn’t be the case and thus, the news shouldn’t be too market-moving. Headline CPI is projected to have risen 0.2 percent in April, leading the annual rate to slump to 0.6 percent, the lowest since November 2001. Meanwhile, core CPI is forecasted to have risen 0.1 percent during the month, leaving the annual rate down at 1.8 percent from 2.0 percent. All told, the Canadian dollar may only respond if CPI rises more than expected (CAD bullish), or if CPI contracts on a monthly bases and drags the annual rates of price growth much low (CAD bearish).

**For a full list of upcoming event risk and past releases, go to

Written by: Terri Belkas, Currency Strategist for
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