FX: Risk Sells Off on Weaker Existing Home Sales

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Disappointment about progress at the EU Summit drove investors back into the arms of the U.S. dollar. The greenback is trading higher against all of the major currencies this morning despite weaker housing market data. Existing home sales dropped 1.7% in the month of September after rising by the strongest amount in 12 months. A pullback after a solid month is natural but the continual decline in the average price of a home sold indicates that there is still weakness in the sector. Softer U.S. data added pressure on risk appetite and drove equities lower.

Up North, the Canadian dollar weakened after CPI numbers showed consumer price growth slowing to 0.2% in the month of September from 0.4% the previous month while core prices remained unchanged. Part of the decline had to do with the currency, which rose to its highest levels in nearly a year last month. A strong currency drives down inflationary pressure that was already weakened by a 14.2% in natural gas prices and 2.2% decline in mortgage interest costs. For the Bank of Canada who meets next week, lower inflation increases the chance of the central bank dropping its hawkish bias.

At this point it should surprise no one that EU leaders chose to take only baby steps towards further integration at the EU Summit. They pledged to agree on a framework for a banking supervisor by the end of the year with gradual implementation throughout the course of 2013. German Chancellor Merkel indicated that the supervision would apply to all banks and not just small ones but this isn’t a final decision because of conflicting comments from EC President Van Rompuy. As for a fiscal union, a more concrete proposal will be presented at the December Summit. On the surface, this means that Europe would be lucky if the complete Single Supervisory Mechanism is in place by the end of next year and a fiscal union by the following year. The prospect of the European Sovereign Debt crisis hanging over everyone’s heads for another 12 months is disconcerting and explains the weakness in the euro. Spain also continued to deny the need for a bailout and warned that they won’t buckle under pressure.

Kathy Lien
Managing Director

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