The US dollar rallied for the second consecutive trading day, as traders were reluctant to sell the greenback on increasingly overstretched forex positioning. Indeed, the dollar appreciated against all major currencies tracked by Bloomberg news. A dismal Pending Home Sales report was not enough to slow the dollar advance, as markets appear to be increasingly resilient to disappointing US economic data. Many analysts subsequently claim that domestic asset classes have already discounted material housing market weakness.
The Euro fell further from record heights, plumbing lows of $1.4138 through early New York session trading. Continued drops in oil prices likewise left the Canadian dollar weaker against its US namesake, with the Loonie trading at parity with the buck through time of writing. The British Pound and Japanese Yen were the least affected by the dollar?s comeback, each losing 0.1 percent to $2.0416 and ¥115.83, respectively.
Strongly disappointing Pending Home Sales results failed to elicit major reactions in key asset classes, as traders have seemingly grown accustomed to poor housing data. The number of sales in previously owned homes fell to the lowest levels in the index?s 6-year track record. Indeed, the 6.5 percent August decline was more than three times worse than median consensus forecasts of 2.1 percent?underlining the pronounced deterioration in housing market conditions. A closer look at the underlying components revealed a nearly uniform year-over-year tumble across regional markets, with zero positives to highlight on the data. The outlook for the housing market remains dim, as continued tightness in credit market conditions promises further tumbles.
The US dollar?s resilience to clearly disappointing economic data suggests that extreme forex sentiment and hesitation ahead of critical economic event risk will slow the greenback?s recent decline. A broad swath of short-term positioning measures show that speculators are heavily overweight dollar-short positions, and a continued unwind may lead the greenback higher through upcoming trade. Likewise significant, traders are reluctant to enter fresh Euro or British Pound longs ahead of later-week European Central Bank and Bank of England interest rate decisions. Markets are unsure of what to expect out of either monetary policy authority, and risk-reward tradeoffs may curtail EUR and GBP bullishness through upcoming price action. The equally critical US Nonfarm Payrolls report due Friday only adds to uncertainty for major asset classes, and volatility is likely to remain muted ahead of the release.
Domestic equity markets likewise showed little reaction to the morning?s Pending Home Sales report, but a sell-off before the open left the Dow Jones Industrial Average modestly below yesterday?s record levels. The Dow lost 60 points to 14,027, while the highly diversified S&P 500 Index fared slightly better at -5 to 1,542. Tech stocks were among the best performers on the session; the NASDAQ Composite shed a mere 0.2 percent to 2,736.
US Treasury yields took a significantly less sanguine view of housing results, with yields falling across the board on increased economic uncertainty. Shorter-dated bonds were unsurprisingly the biggest movers on the day, with the 2 and 10-Year Treasury notes shedding 4 basis points in yield to 3.96 and 4.51 percent, respectively. The longer-dated 30-year Bond posted similar movements, with yields on the safe-haven asset dropping 3bp to 4.76 percent.
Written by David Rodriguez, Currency Analyst for DailyFX.com?