What will happen to housing in 2006?
US Dollar
With no major economic releases on the calendar
yesterday, the dollar recuperated a part of its losses during the Asian session
and then spent most of the US trading session range bound. Analysts around Wall
Street have been releasing their 2006 forecasts this week. We have done the same
yesterday and there is one resonating theme that we have seen in most reports
which is that for once, analysts and economists are collectively agreeing that
some sort of slowdown in the housing market should come next year.
The NAHB housing market index was the only
release on the calendar and the disappointment from the release was hardly
surprising since the housing market has already shown signs of slowing. Falling
to a 32-month low of 57 in December, evidence that the Fed’s interest rate hikes
are slowing the economy is becoming increasingly apparent. A slowdown in the
housing market has broad ramifications for the economy as a whole. Not only
could it directly impact consumer spending, but it can also have residual
effects on the construction sector and demand for building materials. In
addition, a large number of jobs tied to the housing market have been created
over the past few years. According to Calculated Risk, since 2002, the number of
real estate agents increased by more than 50-percent. Should the housing market
turn, the labor market could also suffer as a result.
Thankfully, most analysts do not expect a full
fledged collapse, but instead just a mere setback. Yet the risks loom large as
refinancing also resulted in a surge in adjustable rate mortgages which are
scheduled to begin to reset to market interest rates. The housing market is
probably the single biggest sector to watch to gauge the health of the US
economy in 2006.
Euro
The Euro ended the US session virtually unchanged
against the dollar. Politics reigned King in 2005 with the breakdown of the EU
Constitution, German elections and the riots in France. Yesterday in Italy,
central bank governor Fazio announced his resignation which puts an end to the
banking scandal that has further damaged the credibility of the country’s
leaders. Director General Vincenzo Desario has temporarily assumed his post
until a more suitable replacement can be found. General elections in Italy are
scheduled for 2006 and the hope is there can be a clear majority, which would
pave the way for reforms.
For the year ahead, the market hopes that more
stability along with a tighter monetary stance could help to bolster gains in
the EURUSD. Data released from the region this morning was mixed. Eurozone
industrial production and France’s current account both came out worse than
expected while German producer prices took a smaller dive. In contrast to recent
reports, Germany was not the laggard this time around with production much
stronger over the previous month. Instead, the -0.8 percent contraction in
activity was primarily the fault of France, Italy and Spain.
British Pound
The British pound sold off against the dollar
yesterday as the UK gave up a part of its EU rebates and Bank of England Chief
Economist Bean sounded another dovish note for a fragile market that is waiting
impatiently for the BoE to signal whether another bout of tightening may be seen
early next year. Bean who traditionally leans more towards the dovish camp said
he was relieved that inflation has slowed down recently. If you recall, consumer
prices came in softer than expected in the month of November. He added that the
central bank will not be sitting on their hands till spring and instead will be
watching the trend of economic data very closely.
Meanwhile, the UK has conceded to giving up GBP
7.1 billion of its EU rebate in an attempt to push through 2007-2013 EU budget.
For the economy, this concession will put a big strain on the Treasury’s budget
— which brings the struggle between Blair and Brown back in focus. Although this
may appear to be a diplomatic success for Blair, it is a serious predicament for
Brown since the rebate will probably be phased out on his watch.
Japanese Yen
The dollar rallied 0.4 percent against the
Japanese yen, which is rather small compared to the currency pair’s 4 percent
slide over the course of three days. Overnight, the Japanese government affirmed
the BoJ’s forecast for rebounding growth and rising inflation. They still
believe that the economy is recovering at a “moderate pace†and that according
to their favored inflation indicator, the GDP deflator, which is also the one
that they are trying to get the BoJ to switch to, prices are expected to
increase by 0.1 percent next year.
However, this seems to be where the agreement
ends. Once again, the government and the Bank of Japan are exchanging mixed
words. BoJ Governor Fukui has toned down his language modestly by saying that
there is no difference between the government’s and central bank’s view on the
economy. Economic Minister Yosono on the other hand continued to stress the
government’s lack of desire to see any changes to the country’s current monetary
policy.
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.