US Dollar, Japanese Yen Slump as 10% Rise in US Home Sales Stokes Risk Appetite

US Dollar, Japanese Yen Slump as 10% Rise in US Home Sales Stokes Risk Appetite


• Euro Up as Euro-zone Manufacturing, Services PMI Reflect Improving Business Conditions
• Commodity Dollars Surge as Global Equities Rally, Canadian Retail Sales Rise 1%
• British Pound Down Across Most of the Majors on Quiet Day for UK Data




US Dollar, Japanese Yen Slump as 10% Rise in US Home Sales Stokes Risk Appetite
The US dollar and Japanese yen were the weakest of the majors at the start of the week, and while this trend emerged during the Asian trading session, the release of US housing data added to the risk appetite building throughout the morning. NAR existing home sales surged by 10.1 percent during October to an annual rate of 6.1 million, the highest since February 2007. A breakdown of the report shows that inventory levels dropped to 7 months from 8 months, led by single family homes (6.8 months) while condos/co-ops supplies are relatively higher (9 months). Demand has been boosted by two things: lower prices and Federal tax incentives. In October, median prices slipped to $173,100 from $176,000, marking a 7.1 percent decline from a year earlier.

On Tuesday, a number of key US economic releases will hit the wires. At 8:30 ET, the second round of third quarter GDP results for the US are anticipated to be disappointing as the index may be revised down to an annualized rate of 2.9 percent from 3.5 percent. That said, such a result would still mark the first expansion in the economy in five quarters and the best reading in two years. As a result, the impact of the news on FX market price action may be limited, unless of course the data is significantly weaker than expected or if there are no revisions at all. Then, at 10:00 ET, the November reading of the Conference Board’s measure of US consumer confidence is expected to slip to a six-month low of 47.0 from 47.7, but overall, there are some downside risks for this report. Indeed, the preliminary reading of the University of Michigan’s consumer confidence index showed that sentiment surprisingly deteriorated in November, with the index falling to 66.0 from 70.6. Disappointing numbers could have especially negative repercussions for risk appetite, but if the index rises in line with expectations or proves to be surprisingly strong, FX carry trades could gain and weigh on the US dollar.

Finally, the minutes from the Federal Reserve’s last meeting on November 3 and 4 will hit the wires at 14:00 ET. Following that meeting, the US dollar fell as they announced that they had left the fed funds rate unchanged at 0.25 percent, as expected, and stated that rates were like to remain “exceptionally low” for an “extended period.” At the same time, the FOMC said that they had reduced their planned purchases of agency debt to $175 billion from $200 billion, but repeated that they would be completed by the end ofQ1 2010. If the minutes reflect a perceived focus on exit strategies, there is potential for the greenback to rally, but if the FOMC members prove to be uneasy about the outlook for growth or the need to expand quantitative easing down the road, the currency is likely to tumble.

Euro Up as Euro-zone Manufacturing, Services PMI Reflect Improving Business Conditions
The euro rallied against currencies like the Japanese yen and US dollar on Monday as the Purchasing Managers’ Index (PMI) readings for the Euro-zone’s manufacturing and services sectors both signaled expanding business activity during November. Manufacturing PMI edged up to a 20-month high of 51.0 from 50.7, and with 50 being the point of neutrality for the index, the data signaled growth for a second month. Likewise, services PMI rose to a two-year high of 53.2 from 52.6, signaling growth for a third month.

Looking ahead to Tuesday, the final reading of German GDP for Q3 is not expected to be revised from initial estimates of a 0.7 percent quarterly expansion and annualized decline of 4.8 percent. However, the euro may respond to the breakdown of the report, as private consumption is projected to yield a 0.4 percent contraction while exports may climb 4.1 percent. If either of these two components disappoint, the euro is likely to pull back while surprisingly strong results could lift the currency as the markets will shift to price in sharper rate increases by the European Central Bank over the next 12 months.



Commodity Dollars Surge as Global Equities Rally, Canadian Retail Sales Rise 1%
The commodity dollars were the strongest of the majors at the start of the week as the Canadian dollar, Australian dollar, and New Zealand dollar all gained over 1 percent against the US dollar and Japanese yen. The moves were attributed to a broad increase in risk appetite, as evidenced by the strength of global equities. Meanwhile, the Canadian dollar had some fundamental support as Canadian retail sales were much stronger than expected in the month of September as they rose 1.0 percent, compared to forecasts for a 0.6 percent increase. The gains were led by automotive, furniture, electronics, and food and beverage purchases. Overall, this represented the second straight month of improvement and suggests consumption will be a positive contributor to Q3 GDP upon its release on November 30.



British Pound Down Across Most of the Majors on Quiet Day for UK Data
The British pound was generally a laggard at the start of the week, but did manage to gain against the ultra-weak US dollar and Japanese yen. There was no data on hand, but a handful of indicators will be released on Tuesday. One report is expected to show that total business investment fell for the fifth straight period in the third quarter, this time at a rate of 3.9 percent. Declines generally don’t bode very well for broader growth, as companies that aren’t investing aren’t likely to be experiencing improved activity or hiring workers. On the other hand, the BBA’s measure of loans approved for house purchases is projected to rise for the seventh straight month in October to 44,000 from 42,088, signaling percolating demand and potentially, increasing prices.