US Dollar Underpinned By Surprise Surge in Existing Home Sales

• US Dollar Underpinned By Surprise Surge in Existing Home Sales
• Euro Fizzles On Tepid Second-Tier Releases

US Dollar – The release of existing home sales lent the US dollar a solid boost in morning trade as the figure jumped a significantly stronger-than-expected 3.9 percent in February - the sharpest rise in three years - to 6.69M from 6.44M. Although the figure for January was revised down to 2.7 percent from 3.0 percent, the markets took the report as unabashedly bullish for US housing and will likely fuel further speculation that the sector has bottomed out. The seemingly cheery data comes as Federal Reserve official Roger Cole admitted a degree of fault yesterday in the fallout of subprime lenders saying, "Given what we know now?we could have done more, sooner,” which may be a more accurate indicator of the times ahead. Indeed, the existing home sales report released today is a calculation of contracts that were signed primarily in December and January, prior to the mid-February subprime breakdown. Furthermore, building permits - a leading indicator for the sector – fell back 2.5 percent earlier this week. It remains to be seen whether traders will acknowledge the signs and focus instead on next week’s calendar chock full of releases. First, new home sales are predicted to rebound after last month’s dismal -16.6 percent reading while durable goods orders are estimated to recover from January’s drop of -7.8 percent. PCE Core is predicted to edge even higher, which may spark concerns that the Fed will be put in the complicated position of dealing with growing inflation and slowing expansion. The final reading of Q4 GDP could garner major attention as well, as the markets will respond swifly to any upward or downward revisions. Manufacturing indicators should improve, but may still reflect broad pessimism on the sector with the Richmond Fed predicted to rise to -4 from -10 and Chicago PMI estimated to hit 49.5 from 47.9. Finally, sentiment reports in the form of consumer confidence and the University of Michigan survey are projected to show that optimism in the US is dwindling amidst rising oil prices, growing inflation, and mounting tensions with Iran.
EURO – A day of mostly second-tier data out of the Europe left the Euro to trade primarily on the back of bullish US dollar sentiment, leading the EURUSD pair to edge below the 1.3300 level. The ECB’s Euro-zone current account surplus widened marginally to 2.7B in January from a downwardly revised 2.0B. However, oil prices were still relatively low during the month and lowered import values, which will likely rise in February and March, eroding the balance. Meanwhile, consumer spending in both France and Italy contracted materially last month, with the French data showing a decline for the first time in five months while Italian Retail Sales fell much more than expected, printing at -0.4 percent – the worst in more than two years – against forecasts of 0.2 percent. The persistent weakness in consumer demand stands as a major roadblock for the robust economic growth amongst the regions’ producers and highlights the imbalances still present in the system. Similar to the US dollar, the Euro will be slammed with a high degree of event risk next week. M3 money supply is expected to rise to an annual rate of 9.9 percent – a 17 year high – while the March CPI estimate is predicted to edge closer to the European Central Bank’s ceiling of 2 percent. Furthermore, business and consumer confidence are both estimated to rise, and combined with the potentially stronger inflationary readings, speculation may amp up for a more hawkish ECB and additional policy tightening to 4.00 percent.
British Pound – With little to speak of in regard to economic releases, the British pound eased towards the 1.9600 figure by the end of the US session as the greenback ruled the majors. The sole piece of data out of the UK was car production for the month of February, which dropped 0.2 percent, leaving no impetus for Cable strength. News flow out of the UK next week won’t be very exciting either, as most of the releases will be second-tier in nature. Nationwide house prices are expected to rise during the month of March while the annual rate of growth is predicted to slip to 9.6 percent from 10.2 percent, leaving the markets wondering if the sector is finally slowing. Meanwhile, the final reading of Q4 GDP isn’t likely to provide many surprises, but any revisions to the original report could create some wild volatility. Wrapping up next week will be GfK consumer confidence, which is projected to show sentiment holding steady at -8.
Japanese Yen – After strengthening through the early morning hours on encouraging economic data, the Japanese Yen eventually caved to the greenback as global equities furthered their gains. The Japanese All Industry Index for January rose in line with expectations at a rate of 0.7 percent led by an increase in demand for services, suggesting that consumer spending has picked up and may support growth in the world’s second-largest economy. However, the devil is in the details, and retail trade and overall household spending are both on tap next week, which should help solidify consensus on the status of the fickle Japanese consumer. Additionally, Tokyo CPI for March is on deck, and although the monthly headline and core readings are estimated to rise 0.1 percent, the annualized figures are forecasted to hold at 0.0 percent, indicating that the Japanese economy is still teetering on the edge of deflation. Should CPI fall into the abyss of negative readings, the probabilities of rate normalization later in the year will be slashed and eliminate any wind left in Yen’s sails, leaving major downside potential for the currency out for the taking.
Commodity Currencies – The Australian and New Zealand dollars held their ground today, remaining relatively unchanged as the currencies benefited from their high-yield status. The Canadian dollar fell lower despite the fact oil pushed above $62/bbl after Iran’s seizure of British naval personnel spurred concern of increased conflict in the Persian Gulf. Australian data will be thin once again next week, while Kiwi should benefit from an expected narrowing in the trade deficit and a forecasted surge in Q4 GDP. Meanwhile, Loonie will be able to look forward price data at the factory gate, with a predicted rise in industrial and raw material costs likely to tilt the Bank of Canada’s bias even further to the hawkish side.