Uninspiring Housing Data, Dollar Holds Onto Gains

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While profit taking on short dollar positions continued to drive the greenback higher against most of the major currencies, we are also beginning to see risk aversion return. Simultaneous easing by the Federal Reserve, European Central Bank and the Bank of Japan has not provided the boost to sentiment that most would expect and investors are starting to realize that even the most ambitious effort from the ECB won’t be enough to save the Eurozone or the euro without political concessions from European governments. The latest pressure on the euro has been caused by the talk that German coalition leaders want the banking union to be limited to only certain banks but what Europe needs is an all encompassing solution that covers both large and small banks. Also, Standard & Poor’s said this morning that it is unlikely Spain’s rating would be cut to junk. While this should be good news for the euro, it also means that Spain won’t be asking for a sovereign bailout anytime soon, leaving the ECB’s Outright Monetary Transactions program untapped.

This morning’s U.S. housing market numbers were mixed with housing starts rising 2.3% and building permits falling 1.0%. The Federal Reserve’s attempts to keep interest rates low have so far provided only limited support to the housing market. By all counts, the real estate sector has stabilized but the lack of momentum is also discouraging. Unfortunately the housing market won’t see a stronger recovery until economic growth in the U.S. accelerates and when that happens, the Fed’s pledge to keep rates extremely low should provide nice buffer for the sector. Existing home sales are due for release at 10am ET and a small increase is expected.

The big story last night decision to increase their asset purchase program by JPY10 trillion. Most investors were surprised by the timing of the move but as we pointed out in our JPY special at the end of the week that it wasn’t a matter of if but a matter of when the BoJ would ease again. While this is a major announcement from the Bank of Japan, the impact on the Japanese Yen was limited because like the Federal Reserve, the BoJ was doing the inevitable.

Kathy Lien
Managing Director

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