Dollar Extends Losses on Existing Home Sales Drop

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The U.S. dollar is trading slightly lower against all of the major currencies this morning with its losses extended after disappointing U.S. data. Existing home sales dropped 1.2% in the month of June from 5.14 million to 5.08 million. The drop caught investors by surprise because sales of previously owned homes were expected to slow but they were not expected to decline, especially after the Fed’s Beige Book report talked about stronger housing activity.

Compared to last week, this should be a much quieter one in the forex market. There’s not much in the way of market moving U.S. data and the most significant event risks will be the Eurozone PMI reports. Although Portugal’s coalition parties and main opposition party failed to reach an agreement, the current government has enough majority to avoid early elections according to President Silva. Holding elections before 2015 would have created renewed political uncertainty for the country, the region and its currency so this was an ideal scenarios for Portugal and the euro.

In Japan, the LDP win also lifted the Yen as the victory allows Prime Minister Abe to move forward with his growth strategy, better know as the Third Arrow of Abenomics. This includes removing trade and investment barriers wherever possible in Japan, comprehensive regulatory reform, deregulation, tax reforms and the creation of National Strategic Special Zones where the distance between home and work is short. The LDP win will facilitate the approval and implementation of these economic policies that will be very good for Japan in the long run.

The Reserve Bank of New Zealand meets this week and despite the rally in NZD today, a powerful earthquake that damaged buildings in its capital of Wellington raises the risk of a rate cut. Thankfully while the 6.5 magnitude tremor was stronger than the 6.3 magnitude earthquake in Christchurch in February 2011, no casualties were reported. After the earthquake initially hit in 2011, the New Zealand dollar sold off aggressively but bottomed in the month that followed after the RBNZ cut interest rates by 50bp. It then went on to hit a record high against the U.S. dollar in August of the same year as rebuilding efforts contributed positively to the economy. The latest earthquake could alter the landscape for the Reserve Bank of New Zealand, who meets later this week. With slower Chinese and Australian growth, we had been looking for the RBNZ to be dovish but they could consider lowering rates again if they feel that economic activity will be negatively effect in a meaningful way.

Kathy Lien
Managing Director

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