The 7.7% decline in S&P/Case Schiller Home Price Index for November was greater than the forecasted 7% decline, which followed a 6.1% decline in October. Both the composite 10 and 20 indices have garnered much attention recently due to their continued track record in predicting the new and existing home sales figures. Yesterday’s release of December home sales showed a 4% decline in sales, or a 41% year on year. The rebound in inventories to 9.6 months’ supply from 8.4 months shall continue to weigh on prices.
The unexpectedly strong 5.2% increase in December U.S. durable goods vs. expectations of a 1.6% is further improving risk appetite at the expense of broadening declines in the yen. Noting that the increase follows following three consecutive monthly declines, optimism remains tempered but not enough to prevent prolonged yen selling.
Gold hits a new all-time high of $934.80 per ounce amid persistent power outages at major South African mines. But falling real interest rates in the United States and the rest of the G-10, resulting from central banks’ expansionist policies and continued inflationary pressures, remain the long-term fundamental drivers to the gold rally. The latest rally is especially boosted by increased expectations that the Fed will opt for the 50 basis point (bp) easing option tomorrow, which will bring the magnitude of Fed easing to 225 bps in the Fed funds rate to 3.00%. With the macroeconomic and market dynamics having yet to be fully played out (rising unemployment, falling consumption, rising personal bankruptcies, and capex retrenchment), the 3.00% Fed funds target remains vulnerable to prolonged cutting at this early stage of the slowdown, thereby further steepening yield curve towards the 200 bps range from the current 140 bps in the 10-/two-year spread.
Gold has been receptive to the latest run-up in equities as risk appetite stabilizes and the dollar remains broadly pressured. But as long as the S&P 500 fails to close above the 1,375 level, we expect further yen buying on the dips at the expense of the EUR, CAD and GBP.
The 10 am release of the Conference Board’s consumer confidence is expected to show a drop to 87 from in Jan from 88.6. Note that although the headline index rose to 88.6, the present situation component tumbled to 108.3 from 115.7. More importantly, the “jobs sentiment” component has fallen below zero as the percentage of those seeing jobs as hard to get exceeds those deeming jobs to be plentiful.
As markets await final word from Bush stimulus package, polls are already showing that only 18% to 20% of respondents plan to spend the tax rebate, while 35% to 50% plan to pay debt with it, which is a negative for consumer spending.
Yen Pressured by Improved Appetite, Durables
The stronger than expected U.S. durable goods orders are dragging the yen across the board as the report further sustains risk appetite. Improved risk appetite combined with falling job vacancies in Japan dragged the yen across the board. The 13% year to date decline in Japanese equities is helping to keep consumer confidence at four-year lows, but these factors are only expected to slow the pace of the yen’s appreciation resulting from deteriorating global investor sentiment. We expect USD/JPY to test the 107.30 resistance, encountering pressure at 107.50, with support shored up at 106.30. In the event that consumer confidence remains above the 85 level and no marked deterioration in the present and jobs components, we should see further yen selling. See below for EUR/JPY.
Euro Eyes 1.4660
Failing to break above 1.48, EUR/USD slips back to 1.4760, in line with our expectations of a retest of 1.4730. The divergent paths of EUR/USD and EUR/JPY are a reflection of improved risk appetite (weighing on the yen) and increased doubts with the ECB’s prolonged hawkishness in the face of speculation of further losses in European banks. Key support stands at 1.4600. A 50 bps Fed cut tomorrow is expected to be neutral to positive for the euro.
Sterling tops put at $1.9920
Sterling drops more than half a cent off its 1.9920 highs as continued evidence of UK retail sales weakness is complemented by dismal news on the property front. Property transactions in England and Wales fell in December, posting their first decline in since August 2005. We expect further losses to extend towards 1.9820, backed by 1.98. U.S. consumer confidence may have to come in below 82 to 83 for cable to find support above 1.9840.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
