Is the housing bubble about to burst?
US Dollar
The dollar was slightly weaker against the majors, but overall
the daily change was fairly nominal. A strong durable goods orders report was
offset by a rebound in crude oil prices and a sharp drop in mortgage
applications. It will be hard for dollar bears to argue about any weakness in
this report with many sectors experiencing a rebound in orders for goods made to
last for more than three years. The market had originally expected the orders to
rise by 0.7 percent, but instead it increased a whopping 3.3 percent. Excluding
the more volatile transportation component, orders increased 4.2 percent. The
only pitfall of the data is that it is for the month of August and the market
has learned to discount most pre-September numbers. Mortgage applications
though, is much more telling. This is the biggest drop in applications since
mid-July. The index fluctuates frequently, but it is still worth noting since we
are seeing more and more evidence that demand is waning.
Traders are also eyeing commodity prices. Even though oil is
only higher by a $1.28, natural gas prices hit yet another all-time high. Given
the short attention span of the markets though and the warm weather yesterday,
it isn’t surprising that traders have once again pushed back fears of what this
means for consumers when the weather turns cooler. With half of the country
using natural gas to heat their homes, the persistent rise in natural gas should
be a bigger concern than the rise in crude oil. Massachusetts Electric has
already announced their plans to hike energy rates by 27%, which would be
effective between November and April. Other companies in the region such as
Keyspan and Nstar have also proposed a winter energy price increase. Yet,
Massachusetts is not the only state where energy prices are expected to rise,
the Railroad Commission of Texas warned yesterday that Texans could expect an up
to 50% increase in their home heating bills this year. But the dollar rages on
as traders juggle momentum and flows with longer-term fundamentals. It remains
to be seen who will win the battle. In the meantime, the US economic calendar is
extremely busy today. Like durable goods, GDP could be less significant this
time around because it is so backward looking.
Euro
The 1.2000 level in the EURUSD is holding well as a brief
foray below that level only led to a sharper rebound. For days now, the
interbank dealing desks have been talking about strong demand from Asian central
banks at the 1.2000 level. Although much can come out of the rumor mill, we
would not be surprised if this really is true — the new basket pegs in Asia and
the recent slide in the Euro could give the central banks a good reason to
accumulate at current levels. Although business confidence held steady in France
and increased in Italy, consumer confidence in Germany slid in the month of
September. The survey was conducted prior to the German elections, so the fear
is that the October survey could be even worse.
So once again we face the situation of who faces a more dire
fate — the US or Europe. Europe has the benefit of a weaker currency to spur
growth, the US does not. The weaker Euro should not only boost exports, but also
continue to offset some of the burden of rising oil prices. In terms of
politics, there were no new major developments in Germany but over in Italy, it
seems that Italian Prime Minister Berlusconi is now having difficulties securing
the resignation of Bank of Italy Governor Antonio Fazio. He claims that he has
done all in his power to get Fazio to resign, but he stopped short of forcing a
resignation. This will probably not be taken well in Italy since it was the
government’s lack of initiative to reprimand Fazio when he got involved in
various corporate scandals that plunged the country into its current crisis in
the first place.
British Pound
According to today’s release by the Confederation of British
Industry, only 26 percent of retailers reported sales volume was higher on the
year with most respondents obviously taking the other side. Mostly affected by
the downturn in consumer spending looked to be any retailer tied to the housing
sector. Sellers of furniture, carpets and other durable goods saw the most
decline with grocery stores and specialist food providers seeing an actual
improvement on an annualized comparison. Nonetheless, the overall disappointing
figures still point to the fastest decline in the survey’s 22 year history and
has contributed to further speculation that benchmark rates will have to be cut
once again in order to stimulate spending.
However, overall arguments remain steadfast in favor of
continued rate cut dismissals by Bank of England officials as they cast their
hawkish eyes over the economy. Contributing to the notion has been increasing
focus on the recent upward stock market activity. With higher valued stock,
consumers may be more inclined to spend as their net worth increases with their
investments. This, coupled with the effects of the most recent 25 basis point
reduction filtering through the region, could prove policy makers correct in
their conservative stance. Time will only tell.
Japanese Yen
Making a significant jump, small business confidence rose in
the Japanese economy for the month of September. The reading is considerably
notable on the session as the Shoko Chukin Bank’s index of confidence rose above
the 50 level, considered the reference level for growth and expansion.
Confidence even rose among retailers, construction companies and other
non-manufacturers. This comes as no surprise considering the recent up ticks in
everything from the central bank comments to overall gross domestic output. Now
with both consumer and business confidence higher, the economy looks poised to
make a charge forward.
However, once again, consumer spending considerations loom
over every optimist as does consumer price deflation. As a result, traders are
looking ahead to tonight’s retail trade data and tomorrow’s consumer price index
report. Although retail figures are expected to repeat for the most part,
consumer prices are expected to tick slightly higher. If the latter does occur,
further optimistic comments by Bank of Japan officials will likely follow.
Ultimately, with Japanese consumers a relatively conservative breed, further
confirmation of a pickup in the economy may foster future spending initiatives.
Kathy Lien
Kathy Lien is the Chief Currency Strategist at
Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading. Kathy has vast experience within the
interbank market using both technical and fundamental analysis to trade FX spot
and options. She also has experience trading a number of products outside of FX,
including interest rate derivatives, bonds, equities, and futures. She has a
Bachelors degree in Finance from New York University. Kathy has written for
Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO
Magazine. She is frequently quoted on Bloomberg and Reuters and has taught
seminars across the country. She has also hosted trader chats on EliteTrader,
eSignal, and FXStreet, sharing her expertise in both technical and fundamental
analysis.