IB FX View

Bullish housing starts data undermines US dollar

Friday July 17, 2009

Fatal explosions Thursday at hotels in Jakarta aroused a whiff of risk aversion in the currency markets. Investors sought the sanctity of the Japanese yen and American dollar as a temporary hideout. In the event there was little to be had, although the dark clouds shadowing lender, CIT continued to weigh on sentiment. The probable bankruptcy may appear over the weekend and the only reason it might not is if the company secures financing from a suitor looking for a good deal. The dollar and yen both lost their sparkle after the strongest reading of housing starts in five years flashed across dealers’ screens.


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A 3.6% jump in housing starts means the annualized reading of houses builders began to build rose to 582,000 thanks to a jump in starts of single-family homes. Starts here jumped by 14%. Building permits, an indication of builders’ intentions to commence a unit, also rose and we can’t deny that this reading creates a sense of stability at a low level. Today’s reading is well off the record 2.27 million volume reached in the dizzy days of January 2006 and leaves starts 46% lower than this time last year.

The knee-jerk reaction was to haul the dollar off its own dizzy heights and although it’s still higher on the day across the board, gains have been significantly pared. The euro buys $1.4108 having gained from an earlier intraday decline to as low as $1.4063. At the end of the day, the housing data leaves us with a larger question: Why does the U.S. need more supply right now? Homebuilders have expressed more optimism and in a recent survey they responded positively about increasing amounts of buyer traffic and healthier sales of new single-family homes. Rising unemployment and increasing delinquencies don’t fit well with today’s optimism. Still, for want of better sentiment for equity prices, investors are willing to take it.

The pound is off a $1.6266 low after the data and now buys $1.6343. Again news of terrorist hotel bombings in Indonesia saw investors trade in riskier currencies for dollars and yen, which of course harmed the pound. Earlier traders focused on the negative content from Thursday’s IMF report painting a dour picture of Britain’s fiscal stance. The report stated that Prime Minister Gordon Brown’s fiscal policy lacked any “credible” plan and would succeed based only on the good will of Britons and the ability of the government to steer a successful policy course. Britain needs to show more fiscal restraint, says the report and on its current path it’s heading for an outstanding debt to GDP ratio of 100% within five years. That event would not be compatible with any nation’s AAA-credit rating and would lead to rising interest rates and pressure on the currency.

Textbook economics from the IMF and a good read, but traders don’t buy it. The pound is undervalued according to many analysts and its budget position is no worse off than anyone else following the financial crisis. Gains for the euro outstripped the sterling today with one euro buying 86.34 pennies.

Yen strength evaporated after the U.S. housing data. Earlier a dollar bought 93.57 before strengthening to 94.21. New vice finance minister, Rintaro Tamaki reiterated the potential damage to the Japanese economy from a strong yen and stated that the authorities wouldn’t hesitate to step in to intervene against excessive currency movements. The euro fell marginally to 132.57 on the day.

Canada’s dollar is now a little firmer buying 89.63 U.S. cents while the Aussie is rebounding from that drop in risk appetite. It has clawed back but is still down on the day at 80.15 against the dollar. Canadian consumer prices fell 0.3% on an annualized basis in June according to today’s inflation data for the first time in 15 years.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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