IB FX View

U.S. housing market headlines mask worsening Asian market sentiment – U.S. dollar off lows

Tuesday August 25, 2009

The dollar’s early attempt at a rally following a tumultuous Asian session, in which stocks fell heavily, was quickly thwarted when better-than-expected data for a widely watched housing price index revealed the largest monthly rise in four years. It seems that the prospects for a recovery in U.S. household finances, bolstered by stabilization in home values is more important than the creation of emergent asset and capital market bubbles with a Chinese government frustrated by the sluggish recovery. The dollar fell to $1.4353 against the euro, while the Australian and Canadian dollars reversed earlier losses.


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The Aussie dollar fell after the Shanghai composite declined 2.6% on the day bringing losses during August to 15%. Shares of industrial and mining companies fell along with those at big lenders after Chinese Premier, Wen Jiabao raised questions over the outlook for the economy. Meanwhile an official at the China Construction Bank Corporation seemed to repeat the Premier’s words warning against “uncertainties in the economy and bubbles in the capital market.”

Premier Wen’s warning on the need to guard against the decline in external demand focused on the potential for weakness to run for longer than earlier expected. At the same time investors sold shares in companies and appear to be growing increasingly frustrated that an earnings recovery, which began to mount at the onset of 2009, is simply not playing out as hoped.

Ongoing rumors continue to indicate that the Chinese government plans to tighten bank capital requirements. The China Business News reported that of the 4 trillion yuan government stimulus so far 1.16 trillion had found its way into the stock market through May. Fears over spurious lending have dogged the apparent Asian rebound and discussions over reigning in lending continue to harm sentiment in the region.

The Australian dollar has rebounded from its reaction to Asian events. The turnaround came after the release of the S&P Case-Shiller house price index in the United States. The widely-watched index showed an increase for the month of June of 1.4% making it the swiftest increase in four years. On the year, a more telling figure, the price of metro-area homes across the 20 leading U.S. metropolitan areas declined 15.4%.

Curiously by the time that the Conference Board’s consumer confidence data was reported mid-morning showing a larger rise in confidence than was expected, equity prices had already fallen from a positive start. The dollar began to rebound paring earlier losses.

The Australian dollar has given up all of its gains and is quoted at 83.84 U.S. cents, while the Canadian dollar has reversed a positive tone to stand at 92.65 cents.

The pound also reversed course. The overall weaker tone to the dollar, allowed investors to buoy sterling using the excuse that the largest number of mortgage approvals in 15 months might signal better times ahead for the domestic housing market. But the equity market session was riddled with weakness in mining and metals companies harmed by the seeds sown overnight with the Chinese story. The pound is currently lower at $1.6376.

Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       

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