Â· Japanese Yen: Trust demand buoys USDJPY for 2nd day in a row
Â· Euro: Strong labor data
Â· Pound: Housing remains firm propelling cable higher
Â· Dollar: GDP on tap
Cable was the star of the night in the currency markets, as better than expected data from Nationwide Housing survey generated a 100 point rally in the unit. The Nationwide survey showed an increase of 0.7% on a month over month basis versus forecasts of only a 0.3% rise. The report suggests that despite the well publicized woes in the UK credit markets, and the overhang of the Northern Rock affair, demand for housing has not cooled materially in the recent weeks, continuing to exert upward pressure on prices.
Indeed today's Citigroup/YouGov September survey shows public inflation expectations for the next 12 months at their highest level since January reaching a 2.6% y/y reading, up from 2.4% in August. Given this dynamic the BoE will have a difficult time anchoring inflation expectations at its rate of 2.0%.
However, it should also be noted that while the Nationwide data did show demand to be steady the pace of increase in house prices slowed to its lowest level in more than year, as the 3 month average expanded at only 1.6% rate. In short, it is unlikely that tonightâ€™s data will have much of a hawkish impact on UK monetary authorities. At best its likely to keep the BoE on the sidelines for the time being. But that in itself could be viewed as positive for the currency given the fact that just a few days ago traders were speculating about a possible rate cut from UKâ€™s Central Bank.
Whether the pound can extend it rally will now depend in large part on how the market reacts to US data. On the docket today are New Home Sales and final revision of the GDP report. The New Home Sales data is notoriously volatile and most analysts expect further declines in the series, but aggressive discounting by vendors may result in an upward surprise providing a small, short term boost for the greenback.
Overall, the market remains in a broad consolidation with most players unclear as the extent of the damage to the US economy by the contraction in the housing sector. Clearly, the latest US economic news has not been constructive for dollar bulls. The low readings in consumer sentiment and the worse then expected drop in Durable Goods yesterday all suggest that the economy is retrenching. However, the calls for an inevitable recession may be a bit premature, especially if labor markets remain steady. To that end this weekâ€™s jobless claims due 12:30 GMT may also be of interest to currency traders. So far there has not been a sharp persistent increase in that series and until there is some evidence of weakness in the labor markets, the US economy is likely to muddle along without a sharp slowdown.
Finally, USDJPY continues to rise approaching the 116.00 level as demand for yield from Japanese investment trusts weighs on the yen for the second day in a row. However, on the economic front there may be a glimmer of hope as tonightâ€™s Small Business Confidence survey improved for the first time in 6 months rising to 49.1 from 47.5. This survey tends to be the leading forecaster of Japanese business environment and as such may be signaling stronger performance in the months ahead. Should that occur the BOJ may entertain the notion of another 25bp rate hike before the year end helping to curtail yenâ€™s status as a funding currency in the carry trade.