The 10.2% plunge in September housing starts to 1.19 million overwhelms expectations of a 3.8% decline, making it the worst figure since March 1993. Building permits tumbled 7% to 1.226 million compared to expectations of a 2.8% decline, reaching the lowest since July 1993. The reports follow yesterday’s release of the home price index, which fell to the lowest level since the index started in 1985. Falling prices, delayed or cancelled construction of new homes and an increasing supply off unsold homes (10 months) have all contributed to the deteriorating state of housing.
September CPI rose 0.3% (exp 0.2%) and core CPI rose 0.2% for the fifth straight month. Annual CPI rose to 2.8% while annual core rose 2.1%. The report suggests that while the retreat in inflation is limited, it may further reduce chances of a Fed cut this month especially as the Fed has yet to see more concrete evidence of a retreat in consumer spending.
Despite the dismal housing figures, its implications for further Fed cuts go as far as affecting household demand, which is the main worry of the Fed.
The dollar had regained the 117-yen level earlier while falling against the rest of major currencies as risk appetite returns on the back of stronger than expected earnings in the United States. Gold remains near its 28 year high of $763 per ounce and oil above 87 as the Turkish Parliament is expected to approve an authorization to conduct operations in Northern Iraq.
At 2 pm EST, the Fed releases its Beige Book on anecdotal business evidence from regional Federal Reserve district banks. The report is gaining more importance especially as Fed Chairman Bernanke noted this week that Fed “Participants at the September meeting also reported somewhat greater caution in the outlooks of their business contacts. Financial market conditions were expected to improve slowly at best.” More
EUR eyes $1.4225 as ECB reminds of inflation The European Central Bank (ECB) remains on message reiterating that combating inflation is its highest priority. ECB council member Klaus Liebscher said today the “The message was and is that risks to price stability are clearly pointing to the upside,'' adding “There are significant upside risks'' and “rising oil prices are also increasing these risks to price stability'.' Such remarks are of extreme importance in offsetting any speculation that politicians would dampen the euro ahead of Friday’s G7 meeting in Washington, DC.
With equity market volatility diminishing and the negative risks are once again focused on US housing, the euro is expected to regain the 1.42 figure, facing resistance at 1.4225. Key upside stands at 1.4245. 2.1% inflation in the Euro zone and an unchanged figure in Germany’s ZEW index should also help the pair stabilize ahead. Support climbs to 1.4150 and 1.4180.
Sterling boosted by jobs, MPC
Sterling regains the $2.03 figure to $2.0340s after UK unemployment dropped by 13K to a 2 1/2-year low in September. The stronger than expected 3.7% increase in the 3 months ending in August from 3.5% in July also helped dampen chances of a 2007 interest rate cut. The minutes from this month’s Bank of England meeting showed an 8-1 vote for keeping rates at 5.7%, with David Blanchflower calling for a 25-bps rate cut.
With the last 14 trading days showing GBP/USD increasingly pressured at $2.0430-40s, this level must be considered as an increasingly viable resistance point for traders looking to open fresh shorts in sterling or unwinding their longs. The current decline in risk may help boost cable towards $2.0385. Key resistance stands at $2.0420. Interim support stands at $2.0290, followed by $2.0270.
USD/JPY exploits rising risk appetite USD/JPY breaches the 117 resistance, which is the 50% retracement of the decline of the past 3 days. The housing figures may have to drop to fresh lows in order to prevent USD/JPY from breaching 117.25-30. Continued stock bullishness from improved corporate earnings has the potential of shoring up carry trades, including further rally in USD/JPY towards the 117.45 target.
Canadian dollar gains on both worlds Rising oil prices (remaining above $87.50 per barrel) and improved risk appetite are a double positive for the Canadian dollar, which should extend USD/CAD selling towards 0.9740, followed by 0.9715. Upside capped at 0.9795, followed by 0.9830. But the return in risk appetite, is weighing on CAD against the NZD, AUD and GBP.
Ashraf Laidi Chief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
