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Thursday March 23, 2006 - 22:14:11 GMT
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Forex: Dollar Skyrockets on Strong Home Resales

DailyFX Fundamentals 03-23-06

By Kathy Lien, Chief Strategist of www.dailyfx.com

• Dollar Skyrockets on Strong Home Resales
• Euro SSI Flips to Negative, Signaling More Losses Possible
• Strong Dollar News and Politics Deals Double Blow to Yen

US Dollar

The US dollar soared against the majors, for the fourth straight day and is coming close to erasing all of the losses that it has incurred over the past two weeks. On what was suppose to be a quiet trading day, the dollar took off on after a report that existing home sales jumped 5.2 percent last month. For those including ourselves who have been predicting a slowdown in the housing market, the latest report shows that so far, the landing has been soft. The National Association of Realtors, the group that published the figure did note that the large rise in sales was most likely due to the warmer weather and lower mortgage rates in January. They expect home resales to have slowed once again this month. It is difficult to perceive how much longer this strength can continue with next week’s Federal Reserve interest rate hike only expected to drive the cost of borrowing higher. The labor market continues to remain relatively healthy with jobless claims falling 11k, to 302k. The market really needs the labor market to continue to hold up, otherwise the real estate sector will not. Tomorrow we are expecting durable goods for the month of February. Sales are expected to rebound about the sharp fall the previous month. With the market seemingly very bullish dollars going into next week’s interest rate decision, a disappointing durable goods number will probably generate much more volatility than a strong one.

Euro

With the dollar gaining strength so quickly, the Euro has naturally been on the losing end of the relationship. To the surprise of many, the region’s current account surplus shrank from –EUR4.4 billion to –EUR3.3 billion. The same month’s trade deficit widened sharply causing many to believe that the current account would suffer a similar fate. However, even though it didn’t, the Euro has not benefited from the improvement. Nor has it rallied based upon stronger Italian retail sales numbers and hawkish comments from ECB council member Mersch who said that the central bank is “vigilantly” watching developments on the inflation front. Price growth in Bavaria, Saxony and Brandenburg Germany, were mixed with flat growth in Bavaria and only mild price acceleration in Saxony and Brandenburg. Annualized price growth however slowed across the board in all 3 regions. This may be a precursor to next week’s CPI number for the region as a whole. Remember the ECB watches the country’s annualized inflation numbers very carefully. The forecasts are now for inflation in Germany, the region’s largest country to slow from 2.1 percent to possibly 1.9 percent. Should this be true in an environment where the market is focusing on higher interest rates in the US, the slide in the Euro could be deeper. This morning we published our weekly FXCM Speculative Sentiment Index. At the time of publication, the SSI was negative, but close to parity. Since then, the ratio has flipped deeply into positive territory which signals that the bias is now for further weakness in the EUR/USD. In addition the USD/CHF ratio is also confirming a possible extension move lower. This suggests that over the next few days, any retracements in the EUR/USD will probably be shallow and instead, the currency pair will aim for support at lower levels. On the French labor law strike front, the Prime Minister has agreed to engage in talks with trade unions to see if they can come to terms with a more satisfactory reform rule.

British Pound

The British pound lost ground against the dollar but gained strength against the Euro for the fourth consecutive day. The economic calendar was light with only the release of CBI industrial orders for the month of March. According to the report, the orders index increased to -16 from -18 with a mild recovery in export orders. The industrial sector is gradually showing signs of recovery which has been promising for the country as a whole. The economic calendar tomorrow is completely empty which means that there will probably be little to drive pound movements aside from dollar and Euro factors. However, sterling traders should bask in the quietness since starting Monday, we will have an extremely busy week. Not only is the US Federal Reserve meeting, but the UK will also be releasing a slew of house price reports, GDP numbers and mortgage lending figures. Bank of England members King, Lomax, Barker, Bean and Nickell are all scheduled to testify on Tuesday while UK Chancellor Gordon Brown is slated to deliver a testimony on the 2006 Budget on Wednesday.

Japanese Yen

After one day of respite, the dollar charged on forward against the Japanese Yen. In fact, USD/JPY was the day’s biggest mover, with the greenback rising 0.8% against the Yen. The Yen was dealt a double blow today but it wasn’t from economics. The trade surplus was the day’s solitary release and even though it came in slightly weaker than expected in February, the adjusted figure was stronger than expected. Instead, dovish comments from Bank of Japan Nakahara solidified to the market that even though the BoJ has dropped quantitative easing, they are far from willing to move away from zero interest rates. Nakahara said that deflation still exists, therefore the economy needs easier monetary policy. Also pressuring the Yen were comments from US Senator Schumer who expects the US government to label China a currency manipulator in their next report if China does not make any changes soon. Interestingly enough, it wasn’t too long ago that we reported rumors of the US government hiring analysts to run case studies on how the markets would react if China was truly labeled a currency manipulator. This goes to show that they may already be contemplating this possibility.

 

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