The yen is coming off its multi-year lows after former Japanese Cabinet member Takenaka said the Bank of Japan (BoJ) might raise interest rates by as much as 50 basis points if the ruling LDP party maintains control of parliament in next month’s elections. Even if the LDP loses control, Takenaka sees a rate hike by the end of year. Takenaka is the architect of former PM Koizum’s economic recovery, which lifted Japan from a decade of deflation.
Will U.S. housing spoil Fed’s neutral outlook?
Wednesday’s Federal Open Market Committee (FOMC) meeting will focus on the Fed’s inflation assessment, with the statement seen largely similar to the May 9 meeting. In light of the evidence of slowing core inflation seen in the last four months of data, there is the possibility that the Fed could drop its characterization of core inflation as being “elevated”, but maintain inflation as the “Committee’s predominant policy concern”. This way, the Fed will signal to the markets that it is acknowledging the recent cooling of core inflation, but that it is not yet ready to declare victory on rising prices, especially with oil prices at nine-month highs. The growth part of the policy statement is likely to maintain the housing adjustment to be ongoing, while recognizing the recent improvement in general activity.
While U.S. equities and treasuries may cheer any recognition by the Fed that core inflation is slowing, such as the dropping of the “elevated” qualifier, the U.S. dollar reaction will be neutral at best. Unlike earlier this year when the notion of a steady Fed was positive for the dollar, a continuation of this assessment is becoming less positive for the U.S. currency due to the ensuing tightening of monetary policies overseas as well as lingering expectations of deteriorating U.S. housing market. Indeed, the future of U.S. housing remains the great unknown for the Fed. Aside from falling prices, home sales and building permits, the rate of sub-prime delinquencies rose by more than 13% in Q1. In a June 5 speech, Chairman Bernanke said:” We are also likely to see further increases in delinquencies and foreclosures this year and next as many sub-prime adjustable-rate loans face interest-rate resets.”
While the Fed will likely paint an assuring picture on the U.S. economy, most data items in this week’s U.S. economic releases are forecasted to weaken from the prior month. Existing homes sales, new home sales, consumer confidence, durable goods and core PCE are expected lower.
Today’s existing home sales release at 10 am EST is expected to show a 0.3% slowdown to 5.97 million in May from 5.99 million in April, posting the third-consecutive monthly decline. But we could well see a sharper decline, such as 2% to 3%, considering the 3% decline in April pending home sales, which tend to serve as a leading indicator for existing home sales. A figure below 5.90 million is broadly negative for U.S. stocks and the dollar.
Yen off the lows Today’s comments from Takenaka were a convenient excuse to scale down excess yen offers across the board. We could see further yen gains in the event of a larger than expected drop in U.S. existing home sales. We view interim support at 123 as a viable target for the day, followed by 122.65. Traders will especially scrutinize whether both existing and new home sales will decline, which has been a rarity in past months. In fact, the last month both types of home sales registered a decline was in July 2006.
An upside surprise in existing home sales may extends the pair towards the 123.65 resistance, followed by 123.85.
Currency traders must be aware of the deteriorating technical picture in the S&P 500 and the Dow, where a bearish convergence is seen in the price and the Moving Average Convergence Divergence (MACD). Friday’s close below the S&P’s 55-day moving average may open the door for further selling. Bearish target support stands at 1,475.
Euro awaits home sales for 1.35 target Euro retreats off its two-and-a-half-week highs of 1.3470 ahead of this morning’s U.S. data. A decline in existing home sales would be the third monthly drop, while a figure below 5.90 million will likely propel the euro towards the 1.3490 trend line resistance, a break of which remains capped at 1.3520 until Tuesday’s new home sales. But we should caution that any extended declines in U.S. stocks of more than 1.0% today may be not necessarily help the euro, which could come under pressure from an overall retreat in risk appetite.
Separately, Germany’s GfK consumer confidence rose to 8.4 in July from June’s 7.4. In the event of a surprise increase in existing home sales, EUR/USD may tackle the 1.3440 support, stabilizing at the 1.34 figure.
CAD retreats on oil pullback seen limited USD/CAD regained the 1.07 figure from Friday’s 1.0660 lows after light sweet crude dropped nearly 90¢ to U.S. $68.25 a following Saturday’s calling off of a strike by Nigerian oil workers. The Canadian dollar’s recent pattern of attracting bids on the dips has become especially consistent amid rate hike expectations from the Bank of Canada next month. And even if the central bank stands pat, the above-target inflation will suffice in keeping a hawkish BoC an indirect booster of the currency.
Friday’s April GDP figures will be key in further determining the pair’s downside, especially as it’s due on the same time as the U.S. core PCE price index.
Upside capped at minor trend line resistance of 1.0735, followed by 1.0750. Interim downside target stands at 1.0680, followed by 1.0660.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 a.laidi@cmcmarkets.com
