By DailyFX - US Dollar Dollar weakness continues to be the predominant theme in the markets as traders shrug off another batch of stronger US...

... economic data.

In fact, strong would probably be an understatement. Durable goods orders in the month of March surged
6.1 percent with orders excluding transportation rising 2.8 percent. This was three
times more than expected and along with that, the figures for the month of February
were also revised higher from 2.6 percent to 3.4 percent. These figures confirm the
strong pickup in GDP growth that the market is expecting for the first quarter. The
current forecasts is for GDP growth to accelerate from 1.7 percent to 4.9 percent.
However, durable goods was not the only piece of good news that was released today.
New home sales also jumped 13.8 percent, printing the biggest increase in 13 years.
This follows yesterday’s sharp rise in existing homes sales and at first glance, the
report suggests we are still far from a burst in the housing market bubble.
However, cautiousness is warranted by housing market bulls because much of the
increase can be attributed to price cuts by builders. On average, prices are 7.1
percent lower from February and 3.6 percent lower from a year ago. Meanwhile
mortgage rates hit the second highest level since 2002, which prompts us to ask once
again, how much longer can this last. Unlike existing homes where price cuts are
more bearable by owners since they are coming off of sharp appreciations in the
past, price cuts by builders of new homes are less so. Nonetheless, the strength of
these reports cannot be refuted and the fact that the dollar failed to hang on to
even a modest rally indicates how deep dollar bearishness has been embedded in the
currency markets. The Treasury’s Beige book report was basically neutral. The
various districts reported tighter labor markets, improving retail sales, but also
slower sales in the real estate sector. They also stressed price pressures and the
difficulty firms have in passing costs onto consumers, which means that they have
been taking the hit themselves. Given the muted response from these reports, it is
even clear that the tone in the market has been set by the G7 and even though moves
are getting somewhat overextended, dollar weakness still remains the predominant
theme.

Euro

Wednesday marks the fourth consecutive day of Euro strength. It is worth noting
that we have not seen a move in the EUR/USD last more than five straight days since
November. The latest bout of Euro strength came from broad dollar bearishness, but
also hawkish comments from the European Central Bank. In particular,
Gonzalez-Paromo said that the ECB could increase the pace of its rate hikes while
Bini-Smaghi added that if the economic recovery strengthens, then the central bank
will adjust rates to avoid inflation. This has raised the question in some minds
that a May rate hike may not be completely off the table. We remain doubtful
however since the ECB is not one to deliver surprises. Meanwhile economic reports
released this morning were mostly positive for the Euro. Industrial orders jumped
2.7 percent in the month of February, bringing the annualized pace of growth to 13.3
percent. Industrial production was flat for the same month, but the upward revision
to the January figure offset the neutral report. The annualized pace of growth also
increased from 3.0 percent to 3.2 percent. Finally, German consumer confidence as
measured by the GfK report rose to 5.5 for the month of May following an upward
revision of the indicator to 5.3 last month. The improved business confidence seems
to be having an impact on the general sentiment of consumers and could also act to
offset some of the risks facing the export market at the moment.

British Pound

In contrast to the Euro which held onto its strength for yet another day, the
British pound weakened against both the dollar and the Euro today. UK GDP for the
first quarter came in right in line with expectations, rising by 0.6 percent, which
brought the annualized pace of growth to 2.2 percent from 1.8 percent in the fourth
quarter. Bank of England member Kate Barker was on the radio today clarifying the
difficulty that the central bank is facing at the moment. Economic data has been
very mixed, particularly in the consumer sector, but at the same time, even though
they have had a limited impact on wages, the fact that energy prices is continuing
to move higher still makes it a concern. Although this comes in contrast to last
week’s reports of strong spending and slower consumer price growth, the fact that
she is still mentioning them indicates that the central bank is still worried. One
month is hardly a trend and it is clear that they are watching these two subsets of
data closely. Local elections are also scheduled in the UK next week. The market
will be looking to see how well Prime Minister Blair’s party does and whether there
will be increased pressure for him to step down.

Japanese Yen

There was mixed performance in the Japanese Yen today with weakness against the
commodity currencies and strength against most other currencies. There was no
economic data released overnight, but the G7’s harsh words on China and the ECB’s
follow-up comments that called for more strength in Asian currencies in general
should keep losses in the yen limited. Japan will be heading into the Golden Week
of holidays next week, which means that we could see a bit more hedging by Japanese
exporters. This could keep USD/JPY pressured going for the next few days.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com

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