Forex Trader Top 3: Euro, Loonie, and Housing Prices
Mark Whistler is the founder of www.WallStreetRockStar.com and is the author of multiple books on trading. Mark’s newest book, The Swing Trader’s Bible – co-authored with CNBC/Fox News regular guest Matt McCall – will be on shelves in late summer, 2008. In addition, Mark also writes regularly for TraderDaily.com and Investopedia.com.
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1. Policymakers Have an Agenda – Euro at Highs
The News:
On Tuesday morning, the euro tested 1.6000, posting a new all time high.
The Breakdown
Comments from ECB and FOMC policymakers have been the main catalysts for the dollar’s decline and the euro rally lately. Clearly, policymakers have an agenda.
Posting new all-time highs last week, there was question over the weekend whether the EUR/USD would be able to make new highs. Then, on Saturday, ECB member Axel Weber told the press, “I am concerned that, with regard to the conduct of wage and fiscal policy, the recent temporary heightened inflation rate could be consolidated for longer than is necessary above the tolerance level of the Eurosystem,” (Bullish euro comment.)
Early Tuesday evening, the dollar began to recover slightly, just before ECB member Noyer made additional comments that a rate hike could be looming. (Bullish euro comment.) In Addition, ECB Governing Council member Yves Mersch told the Financial Times the question of a rate hike is ‘fully justified.’ Mersch could not have made a more euro-bullish comment.
Also this morning, the Wall Street Journal covered an interview with Dallas Federal Reserve President Richard Fisher, who isn’t particularly in favor of a rate cut during the FOMC meeting next week.
An excerpt from Sudeep Reddy’s interview: “In an interview Monday, Mr. Fisher said slower growth may not address inflation concerns because the world economy – a key driver for surging commodity prices – is only facing a mild slowdown. “We’ve been weakening and we haven’t seen the price responses,” he said.
“Mr. Fisher said the U.S. may face a “long period” of “anemic growth” as credit and housing pressures weigh on the economy. Lower interest rates may not help businesses create jobs until the credit system is repaired, he said.”
Fisher knows that lower U.S. rates will only fuel inflation even more, while also potentially taking the U.S. dollar even lower. However, other FOMC policymakers seemingly agree that rate cuts are the way to go. More rate cuts will only drive the U.S. dollar lower, which in turn will help oil ascend, which in turn will fuel inflation. Fisher may be too hawkish, but he does have his head on straight.
The Bottom Line:
Increases and cuts in interest rates are a band-aid to a larger problem. It’s clear that both the U.S. and Euro Zone policymakers have their own agenda. Fact is, a stronger U.S. dollar would help ease the price of oil. What’s more, protectionist trade policy, like tariffs on Brazilian sugarcane ethanol, only fuel inflation through keeping agricultural prices artificially high. Rate cuts and hikes are band-aids, while trade policy, credit policy and debt are the real problems. Policymakers who constantly make interest rate cut comments to media, but not discuss the real problems – clearly have an agenda, which may not truly be aimed at helping consumers, but rather big business and the Government instead.
The ECB clearly wants the euro to move higher, as seen in multiple press-comments about an interest rate hike to ease inflation. Because oil is traded in U.S. dollars, when the dollar falls, Europe enjoys cheaper oil. Again, driving the dollar lower through comments about an ECB hike is a band-aid. Trade and fiscal policy supporting high oil prices and agricultural protectionism – are the real inflationary problems.
2. Bank of Canada Cuts Rates
The News
On Tuesday, the Bank of Canada cut interest rates by 50 basis points to 3.0%.
The Breakdown
First, please read #1 above. In 2007, the loonie hit parity with the U.S. dollar for the first time ever. However, with recent signs that the Canadian economy is slowing, the Bank of Canada decided to act quickly and cut rates.
Inflation remains in check in Canada, with CPI reporting core inflation at 1.5%, below the bank’s target rate of 2.0%. At present, Canada’s economy is still showing signs of growth – though slowing – and the Bank of Canada is doing what it must to keep the economy healthy.
The Bottom Line
The Bank of Canada is clearly at the right band-aid at the right time, to keep the loonie from becoming overvalued against the dollar. Clearly, the Bank of Canada is proactively taking the steps the ECB should have taken months ago.
3. U.S. Housing Prices Fall 8% Year Over Year
The News:
The National Association of Realtors reported existing home sales declined 2% in March year over year, posting a 19% decline in the same period.
The Breakdown
Home prices across America are falling, as seen in the national average 8% decline year over year.
Looking year over year numbers, Midwest homes sales are down 16%, sales in the Sales have fallen 20%, the West declined 22% and the Northeast dipped 19%.
Year over year, home prices in the West have declined 15%, sticker prices in the South fell 7%, the Midwest dropped 5%, while the Northeast actually gained 4.6%.
The 30-year Fixed Mortgage Rate is presently 5.83%, up from lows witnessed earlier in the month. One area of concern is – as you can see on the below chart – despite interest rates coming down in March, existing home sales did not pick up dramatically. It is important to note that at the same time; sales did not fall through the floor as well, which is an optimistic sign of some stability.
However, even with reasonably low rates, American’s are not buying houses at this time. The weak economy is certainly much of the issue; however, the decline in ‘stated income’ mortgage availability is likely the main culprit.
The Bottom Line:
On Wall Street, when companies report earnings, one of the major ‘killers’ of a stock can be missing analyst expectations and/or lowering future guidance. What I’m saying is that growth expectations can often be a major factor weighing down a stock, even if the company is solidly in the black. Within real estate, what we must remember is that even though sales numbers are down year over year, unrealistic growth expectations, like those witnessed in the exuberance of the past few years are nothing more than – expectations. At times like this, when Media headlines tout that the sky is falling, we need to take a step back and realize that all businesses run in cycles – and at present we’re simply in a pullback in real estate. Real estate will recover, patience is simply needed during this time.