Dollar Unfazed by Drop in Pending Home Sales and Hudson Employment
By DailyFX – The US dollar has recovered from Mondays sharp losses thanks to profit taking and position squaring ahead… … of the Independence Day holiday.
Even though trading tomorrow should be quiet, traders should
not become complacent, because we still have very important and market
moving data scheduled for Thursday and Friday. The recent deterioration
in the housing market makes job growth last month particularly
important. Pending home sales dropped to the lowest level in 5 years
during the month of May which suggests that existing home sales in June
could continue to remain weak. Potential homebuyers are either facing
difficulty getting mortgages or are simply holding out for lower prices,
neither of which provide a promising outlook for the housing market.
However the long held belief has been that as long as people in the US
have jobs, they will prevent the housing market from collapsing by
continuing to service their mortgages. The market expects job growth to
slow in the month of June, but economists may be underestimating the
potential decline. The Hudson employment index plunged 6 points last
month to 101.2, the lowest level of job growth in 9 months. This
follows a drop in the employment component of the manufacturing ISM
report that was released on Monday. Service sector ISM and the ADP
release will shed more light on how bad Fridays non-farm payrolls
number could be, but at this point the leading indicators for payrolls
that we typically look at suggest that job growth could be weaker than
most people are expecting.
Be Careful of Reserve Bank of New Zealand Intervention, Australia Rate
Decision Should be Non-Event
Central banks love to intervene in the markets when liquidity is low
because that is when they will get the most bang for the buck.
For the Reserve Bank of New Zealand, this is particularly important
because their war chest for intervention is estimated to be only USD$5.3
billion. Although the RBNZ is suspected of having intervened three
times last month, the only time that they officially confirmed
intervention was on June 11th. It is not a coincidence that the central
bank chose to intervene when Australian markets were closed for the
Queens Birthday. If they intervened on a holiday once, they can do
it twice. Central bank Governor Bollard must be extremely frustrated
that their intervention has done nothing to stem the New Zealand
dollars rise. In fact, the New Zealand dollar rose to a fresh 25
year high against the US dollar this morning before ending the day
slightly lower. For more on whether intervention is effective, see our
Special Report. Tonight, we also have the Reserve Bank of Australia rate
decision followed by the Australian trade balance. The announcement
should be a non-event because the RBA is not expected to raise interest
rates and when they do not, no statement is released. The recent
strength of the Australian dollar is expected to push the trade balance
lower in the month of May. A weak number would follow todays sharp
disappointment in retail sales.
Strong Euro Could Delay ECB Rate Hike
The rebound in the US dollar has led to a retracement in the Euro but
this does not mean that the EUR/USDs shot at a new record high is
over. US traders will be missing out on two key economic releases due
out from the Eurozone tomorrow morning. We are expecting service sector
PMI and retail sales. Given the surprise improvement in the
manufacturing PMI report, the market is forecasting similar strength in
the service sector. Whether or not this will help the Euro rebound will
be dependent upon how bad Eurozone retail sales was in the month of May.
The sharp drop in sales in Germany that month has pushed expectations
down to -0.5 percent. The marquee event this week is of course the ECB
interest rate decision on Thursday. The recent rise in the Euro could
reduce the central banks urgency to raise rates since a stronger
currency automatically reduces inflationary pressures. Meanwhile the
Swiss franc gave back nearly all of its gains after consumer prices fell
short of expectations in the month of June. The annualized pace of
growth increased from 0.5 percent to 0.6 percent instead of the
markets 0.7 percent forecast. This should be a just a bump in the
road however since the Swiss National Bank is still expected to lift
interest rates next quarter.
British Pound Should Hold Near 26 Year Highs Going into BoE Rate
Decision
The British pound hit another 26 year high this morning on the back of
a stronger than expected construction sector PMI report. In contrast to
the US, the housing market in the UK has been extremely healthy. In
fact the 60.1 print in the PMI index is the strongest in over 3 years.
This indicates that not only are house prices accelerating, but the
demand for residential buildings is increasing as well. Manufacturers
do think that they are reaching a top however since the future business
activity index dropped to the lowest level in a year. The value of the
British pound should remain high going into Thursdays interest rate
decision. Before that we do have service sector PMI which is expected
to improve slightly in the month of June. The market continues to be
unfazed by the terrorist threats in London which is a testament to the
currencys resilience.
Profit Taking Hits the Yen Crosses
The Japanese Yen is stronger across the board today after comments from
Bank of Japan member Nishimura. He hinted at the possibility of a rate
hike by saying that keeping rates low for a long time is not
prudent. We think that the market may have overreacted or the
selling may be primarily due to profit taking because recent economic
data indicates that the economy may not be ready for a rate hike.
Besides that, there seems to be no real basis for the yen rally today.
There is no major Japanese economic data for the remainder of the week,
which means that the moves in the Yen crosses will primarily be
dependent upon the demand for carry trades.
DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com
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