Dollar, Risk Appetite Avoid Major Shifts on European Financial Concerns, Plunge in Home Sales

• Dollar, Risk Appetite Avoid Major Shifts on European Financial Concerns, Plunge in Home Sales
• Euro Slips after Growth Readings Ease, Banks Fall Back on ECB Support
• British Pound Supported by Improved Financial Outlook and Now Interest Rate Expectations
• Canadian Dollar Completes a Dramatic Fundamental Reversal with a Plunge in Retail Sales
• New Zealand Dollar Looks to Overtake Canadian, Aussie Currency Strength with GDP Figure

Dollar, Risk Appetite Avoid Major Shifts on European Financial Concerns, Plunge in Home Sales
The dollar fell for the first time in four days Wednesday; but this slump was not commensurate to the performance of other risk-sensitive asset classes. This divergence between safe haven currency and underlying fundamental theme can be traced to the specificities of the shift in risk appetite as well as a clear deterioration in the dollar’s own position on the growth and yield spectrum. Offering some level of support for the greenback on the day was the attention paid to uncertainties in the credit and financial markets. Over the past few days, we have seen events that would typically be considered fuel for a bullish push investor sentiment (the yuan’s decoupling as a balance for the global recovery and the meaningful budget efforts being made by G7 economies); but neither of these developments would translate into buying pressure behind growth-dependent assets. This seemed to signal a greater sensitivity to negative developments for speculative tastes that would naturally translate into volatility given a slump in risk considerations. Such a shift would occur today with another flare up in fear related to the health of the European Union’s financial markets. Yet, evidence that the credit market is closing to European banks and governments seems to lack the necessary surprise quotient to revive the mid-April to mid-June bear trend that was put on ice a few weeks ago. The deterioration in the Euro area was enough to lead the regional stock benchmarks to losses of more than one percent; but the Dow actually ended the day slightly higher.

Where risk appetite trends would fail to put the dollar in motion; definable event risk would jump start activity. In the morning hours of the New York session, the markets were delivered a shock when the US Commerce Department reported an incredible 33 percent collapse in new home sales through the May. Not only was this the biggest monthly drop on record; but the 300,000 annual pace of sales was the worst overall level of activity since the series began back in 1960. Another indicator that did not garner as much attention, but adds to the general concern over the health of the US housing market, was the MBA mortgage applications numbers for the week ending June 18th. Looking at the details of this report, we see that the purchases component tumbled 1.2 percent to the second lowest level reported since 1997. Altogether, this data paints a very bleak picture of a critical sector of the US economy – and coincidently, the same segment that ignited the Great Recession and financial crisis. Given the underlying economic conditions, it is no surprise that this vital region of the economy cannot find traction. With home values dropping well below mortgage obligations, foreclosures continue to rise; and a tepid recovery in employment and wages naturally denies Americans the ability to purchase a home with credit is still difficult to come by. Putting this specific concern into context, the health of housing is a reminder that the honeymoon period of the economic recovery will end and the struggle for strong, sustainable will increase.

Another fundamental weight on the dollar’s shoulders Wednesday was the Federal Reserve’s monetary policy decision. Few would have placed a trade on the believe that the central bank would announce a rate hike; but market participants are growing increasingly receptive and reactive to subtle changes in details that can be used to establish a time frame for the eventual change in policy stance. Though it is a common sight at this point, the warning that rates would be left at “exceptionally low” levels for an “extended period” is still discouraging for bulls as it suggests that rates will not be raised in the foreseeable future. Further disheartening the few hawks out there, the statement that followed also made note that financial conditions were less supportive of growth. This is just another factor that will keep that first rate hike in the future.

Euro Slips after Growth Readings Ease, Banks Fall Back on ECB Support
The economic and financial situation in the European Union seems to be deteriorating by the week. However, the implications are perhaps more subtle than speculators are accustomed to. Today, most market participants were looking to the financial headlines for the day, which included the hold from the German GfK consumer confidence survey and the notable slip in the business performance indexes. The 3.5 reading from the German sentiment report is not particularly remarkable from an economic or historical perspective. What was interesting though was the slip in the German and Euro Zone PMI readings for the service and manufacturing sectors. It seems we are now starting to see the consequences that financial uncertainty has on growth. Forced stimulus withdrawal, a severe cut in government spending and frozen credit markets will ultimately cool economic activity. That being said Euro Zone’s composite reading for June (considered a proxy to broader growth) slipped a second month – though it does so from a near three year high. Speaking of financial health, the signs of trouble are growing. In a five-year debt auction today, Portugal would draw a yield of 4.66 percent. If it rises much higher, the country will have to ask for European Financial Stability Facility funds as it cannot afford these rates. Furthermore, Greek and Portuguese banks tapped the ECB for 89.4 and 35.8 billion euros last month respectively.

British Pound Supported by Improved Financial Outlook and Now Interest Rate Expectations
As the fundamental foundation underlying the dollar and euro erodes, the backdrop for the British pound continues to improve. Following up on yesterday’s ambitious budget report, Moody’s joined the round of praise by saying the plan was “supportive” of keeping the nation’s top credit rating. With the financial future seemingly improved, traders would be less concerned with stability and moved on to something that was more critical for appreciation. Interest rate expectations have been well off the radar for some time; but today, murmurs of the sterling’s return to a yield status began when it was reported MPC member Sentance voted for a hike. Now all that is needed is confirmation of a strong economy.

Canadian Dollar Completes a Dramatic Fundamental Reversal with a Plunge in Retail Sales
In the past week, the outlook for the Canadian dollar has been devastated. Following the cautionary and dovish commentary from the BoC Monday and the slip in inflation pressures Tuesday; interest expectations took a tumble. Today, the a 2.0 percent drop in retail sales added a growth element to this dour forecast. The Canadian dollar is already trading at a premium and it is quickly losing its high-yield appeal.

New Zealand Dollar Looks to Overtake Canadian, Aussie Currency Strength with GDP Figure
With both Australia and Canada stumbling on interest rate expectations and now growth levels, the New Zealand dollar is quickly advancing to the top spot in the commodity bloc (a naturally buoyant group when sentiment is positive). Early in the Thursday session, the government reported first quarter growth of 0.6 percent and a 1.9 percent annual pace in activity – the fastest in two years.

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