The unexpected 3.9% drop in U.S. February new home sales to 848,000 following the revised 15.8% tumble in January dismisses the notion of stability in the U.S. housing slowdown, while triggering the classic play of falling risk appetite, i.e. an all around rally in the yen, at the expense of a sell-off in U.S. equities. New home sales fell to their lowest level since June 2000, while the months supply rose to 8.1, the highest in 16 years.
Most significantly, the home sales report should place the burden on Federal Reserve Bank Chairman Ben S. Bernanke to come up with a more detailed assessment regarding the deterioration of the U.S. housing slowdown beyond simply describing it as “adjustment in the housing sector is ongoing,” as was done in last week’s FOMC statement. Bernanke may not be expected to sound off the usual sanguine tone on housing and the economy, especially when testifying to a group of anxious lawmakers, who are representing constituencies affected by the sub-prime fallout. As Bernanke gives a more detailed view on the Fed’s downgrading of the housing sector, we expect the market to continue dragging the dollar lower and trigger further yen gains.
Tuesday’s figures on U.S. consumer confidence and U.S. Home Price Index should especially further endanger risk appetite and extend the sell-off in the dollar and equities to the favor of the yen.
U.S. Dollar Index bearishness intact
As we mentioned in this morning’s analysis “Euro nears stabilization point” and “Fiscal year-end repatriation to support JPY,” our assessment of a near-term peak in the dollar bounce has materialized. The technical argument is explained by the short-term rebound in the U.S. dollar index, which failed to breach above the neckline of the head-and-shoulder pattern at 83.40—a bearish signal in the pattern. This failure is now validating the head-and-shoulders formation as the USDX is dragged below the 82.80 level, which should call up the 82.30 low of December.
The report is likely to limit any rebound in USD/JPY to 118.40 particularly if a continued sell-off in U.S. equities (decline of more than 1.3-1.5% in S&P and Dow) triggers similar proportional downside in Asian equities tonight. We expect interim resistance at 118.20 to give way to 118.40, but deteriorating losses in equities should maintain support at 117.80 and 117.50.
EUR/USD is in line with our assessment indicating:” we do not see any fundamental argument specific to the Euro zone that validates further EUR declines below the 1.3250-55”. Indeed, EUR/USD held up at 1.3256 before the home sales-led rebound to 1.3350, which is the 61.8% retracement of the 1.3409-1.3255 decline. Deterioration in U.S. equities coupled with renewed yen gains is likely to limit EUR/USD between 1.3320 and 1.3350.
GBPUSD breaks well above our stated resistance of 1.9650 largely on the back of the US data and the rebound in EUR/USD. Profit taking is likely to drag the pair back towards previous resistance of 1.9650, which is now seen as interim support. Expect 1.9660-1.9700 range to act for rest of day. Downward bias likely to return in higher-yield sterling in event of deterioration of equity sell-off.
Dollar strength exploits further escalation of risk appetite as the lower yielding currencies of AUD and CHF under-perform across the board. Friday’s unexpected increase in U.S. new home sales to 6.69 million boosted the dollar across the board and further reduced pessimism with the fallout from the sub-prime lenders. The dollar retains most of its gains versus JPY, EUR, GBP, CHF and CAD amid expectations that this morning’s new home sales will rebound after January’s 17% slump. More below.
The highlight of this week will once again be the Federal Reserve Bank. Chairman Ben S. Bernanke is scheduled to speak on the economic outlook before the Joint Economic Committee on Wednesday, where he will likely be questioned on the mortgage sub-prime fallout and the likelihood that these problems will filter into the average consumer and the general economy. The issue should create a heated performance by lawmakers speaking on behalf of their affected constituents, and Bernanke will be subject Bernanke to the highest degree of pressure and questioning since assuming the chairmanship. His appearance will be especially contentious in the event that today’s new home sales endure renewed declines.
The 10 am EST release of U.S. new home sales for February is expected to show a rise to 990,000, after 937,000 in January. The inherent volatility of the report is likely to bring about renewed surprise. Considering the current upward bias in the dollar following the upside surprise in existing home sales, a rebound past the 1.0 million mark in new home sales could trigger further dollar strength and lift 10-year yields past the 4.60% level.
Euro nears stabilization point Despite the emerging dollar bullishness on the back of improved existing home sales figures and reduced global risk appetite, we do not see any fundamental argument specific to the Euro zone that validates further EUR declines below the 1.3250-55. But it would take another strong upside surprise in U.S. new home sales (to 997-1.0 million) for the EUR/USD to extend losses to 1.3250, a break of which to clear the way for 1.3210. Renewed declines in new home sales will see interim resistance at 1.3290, followed by 1.3325. Key resistance stands at 1.3350-55.
Fiscal-year end repatriation to support JPY
The deterioration of the yen is amplified by a combination of resurging risk appetite, improved U.S. housing data, and markets’ reevaluation of a shortsighted interpretation of FOMC statement. But Japanese institutions that have not carried out their end of fiscal year repatriation have less than one week to do so. Interestingly, despite the yen’s 0.5% rise year to date against the dollar, the currency is unchanged over the past six months, or the second half of the Japanese fiscal year. Thus, the current rate of 118.40 may mean a break-even point for unhedged institutions seeking to bank on the repatriation of USD-denominated assets.
Breaching the key 118.30 resistance, 118.40 figure stands as the 50% retracement of the decline from the Feb. 23 high. Subsequent resistance is the 100-day MA at 118.50, a breach of which is apt to call up 118.80 as the daily MACDs seem ripe for further gains. Support seen emerging at 118.20, followed by 117.80.
Cable seen capped at 1.9645-50 We continue to see cable’s gains running out of steam at 1.9650 amid reduced fundamental need for additional BoE tightening. Remaining evidence of home price escalation is likely to be overshadowed by the MPC’s concerns in the cooling of the labor market. The 1.9640-1.9600 range continues to be a favorite zone for range traders. U.S. new home sales weakness is likely to boost the pair towards 1.9640 where trend line resistance since March 22. 1.9650 is the 50% retracement of the 1.9725-1.9570 decline. Key resistance stands at 1.9670. Traders must also keep watch on the latest developments with the British sailors being detained by Iran and Tehran’s latest response to the U.N. Security Council’s decision to escalate sanctions. Support at 1.96 and 1.9570.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
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New York, NY 10005
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a.laidi@cmcmarkets.com
