Dollar - Will Housing Continue To Collapse?

Talking Points

•    Japanese Yen: trapped near 114.50 midpoint as Nikkei reverses gains

•    Australian Dollar: CPI prints hot

•    Euro: Hovers near 1.42 as PMI flashes slowdown in manufacturing

•    Pound: Hangs near 2.0500 as strength continues

•    US Dollar: all eyes on housing

Another night of seesaw action as the high yielders first rose on buoyant stock action in the US, only to turn lower when Nikkei staged a major reversal to the downside. The Nikkei which at one point was higher by a 120 points, ended the day down -92 points taking many of the FX carry trades down with it.

In economic news Australian CPI numbers printed slightly hotter than expected with the annualized weighed median coming in at 3.1%, against a forecast of 2.8% rise. The strong numbers increased the risk of another 25bp RBA rate hike at the November 7th meeting. However, given the fact that Australian election is scheduled for November 24th we wonder if the RBA will follow suit of many other OECD central banks and stand down ahead of this major political event.  Despite the clearly supportive fundamentals Australian monetary authorities may wish postpone any policy decision until the December meeting in which case the Aussie may come under some profit taking pressure.  

The euro continued to underperform the pound in overnight trade as the early PMI survey reading flashed the first signs of trouble for the manufacturing sector. The manufacturing PMI dropped to 51.5 against 52.9 expected, it lowest value in 18 months and within striking distance of signaling a contraction as the high euro is beginning to exert a negative influence on the regions industrial sector. Meanwhile, the services component actually performed better than forecast printing at 55.6 versus 54.5 consensus, with the end result being that that composite reading remained comfortably above the 50 boom/bust line at 54.5. Nevertheless, the first unequivocal evidence of slowdown in EZ manufacturing, indicates that the ECB despite its tough talk will do nothing on the rate front for the rest of the year. As we noted last Friday, “If rate expectations for ECB are indeed scaled back… the (EURGBP) cross which hit .7000 once again in overnight trade on further rate hike speculation, may begin to correct towards the 6900 figure as traders adjust to the latest economic news flow.” With the cross now trading at 6940 it appears to be heading in that direction.

Finally, today brings the US Existing Home Sales data and dollar bulls will anxiously look for any signs of stabilization in the bruised and battered US housing sector. Another negative surprise may seal the deal on a Fed rate cut next week and could push the greenback lower, especially if equity markets rally on the news and carry trade flow comes back into the market.