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Tuesday March 25, 2008 - 22:33:01 GMT
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Forex Research - Dollar Weakness Resumes as Housing and Confidence Deteriorates

Tuesday, 25 March 2008 21:43:32 GMT

Written by Kathy Lien, Chief Strategist

• Euro Rallies Ahead of German IFO Report
• Australian and New Zealand Dollars Extend Gains But CAD Fails to Benefit from Stronger Retail Sales

Dollar Weakness Resumes as Housing and Confidence Deteriorates
The sell-off in the US dollar resumed sooner than we had initially anticipated on the heels of surprisingly weak economic data. Consumer confidence slipped to 5 year lows as house prices tumbled more than 10 percent. Despite the increase in existing home sales, the housing market remains very weak. Sales only increased because bargain hunters were scouring the inventory for foreclosures. The weakness in the housing market spells more trouble for the US economy and the US dollar because consumers are now dealing with the triple blow of falling housing market values, a deteriorating labor market and rising prices. If we do not see a rise in both the average price of new home sales as well as the amount of homes sold, the Federal Reserve may have no choice but to step up the gas on lowering interest rates. In addition to the housing market numbers, durable goods are also due for release. Believe it or not, the futures curve is pricing in a 45 percent chance that the Fed funds rate will be at 2percent by the end of August. This means that they expect the Federal Reserve to slow down significantly with their next rate cut possibly being their last. We believe that this is overly optimistic because the labor market in the US should deteriorate even further over the next few months. Over the past two weeks, we have had layoff announcements from Citigroup and Goldman Sachs. The NY Times is reporting that another 20,000 jobs could be cut in the high-paying financial sector over the next 2 years. CNBC expects Bear Stearns to cut 50 percent of its 14,000 large workforce. We are not going to speculate about the extent of the layoffs, but this does agree with our overall view that the labor market will get worse before it gets better. The statistic that we have been quoting for some time is from 2001 and 2002, when the US economy endured 15 consecutive months of negative job growth. In many ways, the US economy faces bigger risks now than it did a few years ago and for that reason a third month of negative non-farm payrolls is not only possible but probable.

Euro Rallies Ahead of German IFO Report
The Euro has taken off ahead of the German IFO report. This was largely due to weaker US economic data, but the fact that the EUR/USD is closing near its highs suggest that there could be follow through, especially if the German IFO report beats expectations. The market currently expects German business confidence to deteriorate, like they do every month because of the strength of the Euro and the European Central Bank’s refusal to cut interest rates. However time and again, German business confidence has proven to be far more resilient than analyst predictions. A strong number is exactly what the EUR/USD needs to drive it back up to 1.58. Aside from the German IFO report, we are also expecting the Eurozone Current Account figures and industrial new orders for the month of January. Meanwhile Switzerland reported an improvement in the UBS Consumption index. This suggests that consumer spending may be rebounding which could also lead to an improvement in the KoF leading indicators report.

Visit the Euro Currency Room for resources dedicated specifically to the Euro.

Australian and New Zealand Dollars Extend Gains but CAD Fails to Benefit from Stronger Retail Sales
Commodity Prices have rebounded and that has helped the Australian and New Zealand dollars extend their rise. The annualized pace of credit card spending has slowed modestly, but it has not stifled the move in the New Zealand dollar. Looking forward however, the number does suggest that consumer spending in New Zealand is beginning to slow. This seems to be the opposite of what is going on in Canada. Retail sales in Canada jumped 1.5 percent in the month of January, which is the strongest pace of growth in 7 months. Canadian consumers are showing no signs of cutting back as employment remains firm. However that has not helped the Canadian dollar today which has been subjected to a significant amount of intraday volatility. When good news fails to be reflected in the price action of a currency, we become skeptical of the price action. Even though the worry lies in slower US growth spilling over into Canada, the strong numbers confirm that at least for the time being, that is not happening.

Tell us what you think on the Canadian dollar Forum.

USDJPY Back at 100
US dollar weakness has resumed with USD/JPY falling back towards 100. Aside from USD/JPY and CAD/JPY, all of the other yen crosses actually ended the day in positive territory. There was no Japanese economic data released but Bank of Japan officials continued to sound a cautionary tone. Shirakawa talked about the downside risks to growth while Nishimura indicated that the central bank’s long-term priority is to boost consumption. The Wall Street Journal had a good article today about the problems with wage growth in Japan. The central bank seems to acknowledge that this is an issue which may partially explain today’s comments. The merchandise trade balance is due for release this evening. The big rally in the Yen actually did not come until February which means that the trade surplus could remain steady.

Visit the Japanese Yen Currency Room for resources dedicated specifically to the Euro.

British Pound Above 2.0
The British pound broke the 2.0 level against the US dollar thanks to broad dollar weakness. There was no UK economic data released, which is why the strength of the pound was only seen against the US dollar and Japanese Yen. The currency resumed its slide against the Euro as the market expects the UK economy to continue to underperform the Eurozone. The economic calendar is empty once again, which means that US data and risk appetite will be the primary driver of the British pound for the next 24 hours.

Visit the British Pound Currency Room for resources dedicated specifically to the Euro.

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By Kathy Lien, Chief Strategist of DailyFX.com

Contact Kathy Lien about this article at klien@dailyfx.com



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