FOREX TRADING

U.S. Review

Home Is Where the Economy’s Heart Is

• Housing starts and existing home sales declined in June, reflecting the winding down of homebuyer tax credits.
• Building confidence fell to 14 in July, and June’s numbers were revised down slightly.
• The effect from the unwinding of various economic stimulus programs is evident in other data, with the leading indicators declining 0.2 percent and weekly firsttime unemployment claims bouncing back to 464,000.
• Bernanke’s midyear report to Congress outlined possible future steps the Fed may take to boost economic growth.

We Have Got to Get in Shape

If the state of the nation’s housing market is at the center of the economy’s near-term prospects, then we have got to get in shape. Nearly all of the major housing indicators reported this past week showed more weakness than was widely expected, suggesting that the payback from the homebuyer tax credit program will be a bit deeper and longer lasting than many had hoped. One of the most disconcerting pieces of news was housing starts, which fell 5 percent in June, following a downwardly revised 14.9 percent drop in May. A slight 2.1 percent rise in building permits initially took some of the sting out of the headline number, but all of that gain was in the volatile multi-family unit series. Permits for new single-family homes fell 3.4 percent, following 10.3 percent drops in both May and April

Single-family permits are now running at just a 421,000-unit pace, well below the recent trend in starts. When you couple this with July’s decline in the Wells Fargo/NAHB homebuilders’ index, there is no reason to expect housing starts to increase in July, and we may not see a gain in August either. With demand flat and credit for homebuilders still extremely tight, there is no incentive for builders to get out ahead of demand.

Existing home sales actually fell less that expected, but the trend remains unfavorable. Existing home sales have been harder to read because of the extension of the closing deadline for homebuyer tax credits from June 30 to September 30. The net effect of the deadline extension will be to moderate the slide in existing home sales over the new few months. (more…)

The Bank of Canada, as expected, hiked rates by a quarter point to 0.75% in today’s meeting. The accompanying release, while saying economic activity in Canada was unfolding largely as expected, did cut its forecasts for growth in 2010 and 2011. Growth in 2010 is now forecast at 3.5% from 3.7%, while the forecast for 2011 was revised to 2.9% from 3.1%. “This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada.”

From the Release: “Reflecting all of these factors, the Bank has decided to raise the target for the overnight rate to 3/4 per cent. This decision leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery. (more…)

BoE policy makers opted to leave both interest rate and APF quantity unchanged at 0.50% and 200 billion pounds, in line with forecasts, to boost recovery that started to gain momentum amid the austerity measures adopted by the government to tame the skyrocketing budget deficit.

Today’s rate decision was also undertaken by only eight members as the new member Martin Weale will join the committee in August’s rate decision.

The British economy has been showing improvement recently but there are fears that growth may wane amid the planned sharpest spending-cut plan in decades. Thus, eyes are on economic fundamentals to assess the performance of the economy and its major sectors. (more…)

In the absence of fundamentals from the euro zone and U.K. and ahead of the release ISM non-manufacturing in the United States, Investors will be focusing on the rate decision on Thursday where the ECB and BoE are expected to leave the cost of borrowing unchanged at 1.00% and 0.50% respectively to boost growth amid the announced austerity measures.

President of the ECB Jean-Claude Trichet urged European economies on Monday to reduce spending to trim their budget deficits as this would enhance growth prospects, confirming that deficit cuts by governments will not affect growth.

Trichet’s announcement moves in line with the G-20 plans which involve cutting deficits to half by 2013. However, U.S. President is giving more attention to boosting growth to support recovery. (more…)

This week, the greenback started with a bang. However after the FOMC announcement, which puts a lid on interest hike prospects, dimmed the USD gains. By Friday, the USD has lost most of the gains from earlier in the week. The yen held its gains better. Commodity currencies such as CAD and AUD also started the week strong, but reversed these gains into losses by Friday. Let’s take a look.

EUR/USD Unconfirmed Bearish Engulfing

Daily and 1H: The daily chart shows this week’s move dominated by the first day, which created an engulfing pattern. However, the rest of the week has laboriously pared some of the initial loses in the EUR/USD.

The projection to 1.17 is still valid, with two negative reversals with the RSI in the Daily chart suggesting this target. (This is when the RSI makes a higher high from bottoming, but price action does not).

Basically there was no bearish confirmation after the signal offered at the start of the week

Looking at the 1H chart, we see the latest twist and turns develop a downswing and then a gartley retracement pattern yesterday. This suggests a swing towards 1.2150 sometime in the beginning of the next week.

We can see in the daily, that the 1.2150 area is an importan powerline, and may be tested as support when the decline reaches it.

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U.S. Review

Despite Disappointing Data, the Recovery Is Still On

• Both existing and new home sales posted disappointing figures this week. Declines in sales for both were likely due potentially to the expiring homebuyers’ tax credit.
• The third revision of first quarter GDP was also released this week with growth revised lower than the consensus had expected to a 2.7 percent annual pace. Final sales, which is a good gauge of underlying demand, was also revised lower to a 0.8 percent annual pace. While growth is slower than initially expected, it is growth, nonetheless.

Did Homebuyer Tax Incentives Build A House of Cards?

Housing market data released during the week were largely disappointing as figures were likely distorted due to the expiring homebuyers’ tax credit. Existing home sales posted a surprising 2.2 percent decline in May while consensus estimates were looking for a gain of 6.1 percent. Economic forecasts took into consideration increases in pending home sales and mortgage applications, which indicated a boost in sales well in excess of a 6.0 million unit pace. According to the National Association of Realtors, roughly 180,000 homebuyers who signed contracts will likely not be able to close by the end of June due to delays in mortgage processing. If this is indeed the case, home sales in June will likely be elevated.

New home sales also fell in May, but while the retracement was expected, the 32.7 percent drop to a 300,000 unit pace, its lowest level on record, was unexpected. The sharp decline is likely due to homebuyers rushing to meet the April 30 contract signing deadline for the tax credit. The seasonal adjustment process also likely exaggerated the extent of the slowdown. (more…)

Highlights

• USD sputters, EUR recovers, but risk lags
• G8/G20 next week may reveal global rifts
• EUR: corrective rally more likely than broad based recovery
• UK budget; austerity on its way

USD sputters, EUR recovers, but risk lags

This past week saw broad based USD weakness against all other major currencies as tensions over the Eurozone debt crisis eased further and optimism returned that the global recovery would stay on track. The EUR was a prime beneficiary of the rebound in global sentiment (more below), but by the end of the week its progress looked to be stalling. From a broader perspective, risky assets (stocks, commodities and JPY-crosses) failed to exhibit the same degree of optimism, suggesting risk aversion remains just beneath the surface. Indeed, gold surged to new all-time highs while US Treasuries rallied and yields remained around recent lows, suggesting safe haven refuges remain in demand. As well, stock markets broke to new highs for the current rebound but seemed unable to extend those gains in any significant fashion going into the end of the week. (more…)

HIGHLIGHTS OF THE WEEK

• In the U.S., consumer prices fell again in May, driving annual inflation 0.2 percentage points down to 2.0%. Core inflation was flat at 0.9%.
• U.S. industrial production surprised on the upside with a 1.2% monthly gain in May. The rate of capacity utilization rose in tandem to 74.7%, landing half-way up its peak-to-trough gap.
• U.S. housing starts fell by a sharp 10% M/M. A contraction in homebuilding was anticipated, but the magnitude was much larger than expected and it highlights the strong headwinds faced by this sector.
• In a speech this week, Bank of Canada (BoC) Governor Mark Carney struck a cautious tone, noting that “no particular path for monetary policy is preordained”. In light of the multitude of risks still clouding the horizon, the BoC remains understandably vague. While it increased the overnight rate to 0.50% on June 1st, and should continue with gradual increases in the months ahead, it is giving itself room to pause the hiking cycle if the recovery wobbles.
• Existing home sales dropped by 9.5% M/M in May. The sales-to-new listings ratio eased from 0.52 to 0.49. In line with this easing in market balance, the seasonally-adjusted average price slipped by 1.0% M/M with Y/Y growth cooling from 12.2% to 8.5%.
• Manufacturing sales and wholesale trade data for April are consistent with a monthly real GDP expansion of 0.3% M/M.

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