Despite weaker economic data out of Europe, the euro is trading higher against the U.S. dollar this morning, which tells us that Spainâ€™s borrowing costs are the only thing that matters right now to EUR/USD traders. Thanks to a T-bill sale that was slightly above target, Spanish ten year yields are back below 7%, helping to stem the losses in the euro. As the decline in Spanish yields reduces anxiety in the market, all of the major currencies are trading higher against the greenback. On Monday we pointed out that the EUR/USD was tracking yields tick by tick as every time 10-year Spanish bond yields rose 10 basis points, the blood pressure of European policymakers would follow. Unfortunately based upon the price action of the EUR/USD and GBP/USD, investors now have the perverse thought that weaker economic data is good for a countryâ€™s currency because it would force central banks into action. Yet this is a very dangerous way of thinking because the European Central Bank and the Federal Reserve are holding back more aggressive action for strategic and not economic reasons. The ECB wants to pressure policymakers into fiscal and banking reform while the Fed wants to reserve a larger balance sheet increase for a more desperate time in the U.S. economy.
According to the latest U.S. housing market numbers, home builders are growing more confident but are not ready to pull the trigger on new projects. More specifically, more permits are being filed but fewer building projects are being started. In the month of May, housing starts fell 4.8 percent, which was the steepest since August 2011 but the details were not nearly as grim as the headline number because starts in April were revised up rom 2.6 to 5.4 percent. Building permits rose 7.9 percent to its highest level since September 2008, which is a strong sign of confidence among builders. For the Federal Reserve, who is currently meeting behind closed doors, the housing market numbers provide another reason for why there is no immediate need for QE3. Weâ€™ll be releasing a more thorough FOMC Preview later today so keep your eyes peeled. However the bottom line is that given Bernankeâ€™s latest comments, the most we expect from the Federal Reserve is an extension of Operation Twist and a promise to keep monetary policy easy.
The final G20 communique will also be released later today followed by the usual comments from G20 leaders who will most likely state the obvious. They will confirm the IMF increase decided 2 months ago and pledge to take steps to reduce debt, increase jobs and promote growth in general. It will be another lame meeting that leaves the market with nothing more than a few glossy photos.