• Pound Recuperates Losses Despite Weaker Data
• Yen Bears Continue to Take the Lead
Although the dollar ended the day relatively unchanged against the other majors, it failed to avoid some choppy intraday price action. Stronger productivity numbers were offset by weaker factory orders, Redbook retail sales and the pending home sales report. Even though the dollar rallied when productivity was revised higher to 4.7 percent from 4.1 percent in the third quarter, the gains were short lived once the 10am EST reports were released. Factory orders rebounded in the month of October, but given the exceptionally strong durable goods report that we saw for the same month, the 2.2 percent rise fell short of expectations. The deal killer though was the exceptionally weak home sales report for the month of October. Although the index is fairly volatile, it just reported a 3.2 percent drop in pending home sales, which is the first back to back slide since last December. We have been warning about a slowdown in the housing market for some time now. With interest rates and mortgage costs on the rise, we see a corresponding increase in the risks that the real estate market faces. Today, there was an article on Bloomberg touting the slump in the mortgage bond market. According to the piece, “Bonds backed by home loans to the riskiest borrowers, the fastest growing part of the $7.6 trillion mortgage market, have lost about 2.5 percent since September on concern an 18-month rise in interest rates may force more than 150,000 consumers to default.” Meanwhile, the weekly retail sales report published by Redbook also reported a 0.3 percent drop in sales for the week ending December 3rd. Before becoming overly concerned though, it has been quite standard to see a drop in sales the week following the Thanksgiving holiday. Tomorrow will probably be just as dull as today with consumer credit being the only release scheduled on the US economic calendar.
The trading range is contracting in the EUR/USD as the currency pair ends the day relatively unchanged. Today’s Eurozone economic releases painted a very similar picture to the service sector PMI reports released yesterday. According to the Bloomberg retail PMI reports, retail sales contracted in Germany and France while accelerating in Italy. The region’s two bigwigs are really lagging in growth based upon recent reports and that is certainly concerning. Yet, any pessimism was erased following the release of German factory orders for the month of October. Orders jumped by a more than expected 2.0 percent thanks to a sharp rise in both foreign and domestic orders. Of mild interest was also a speech by ECB member Hurley who confirmed the central bank’s hawkish but conservative stance. He said that interest rates are still low but the ECB needs to continue monitoring economic data closely before making their next decision. At this point, the market is also treading carefully. The hawkish but conservative comments from both sides of Atlantic has been swayed more to the US’ favor for some time now. We expect this to continue to be the case unless either camp shifts their stance markedly.
Although the British pound ended the day unchanged, it staged quite a significant intraday recovery. The pound had dropped over 100 pips within an hour after the negative industrial and manufacturing data spurred speculation of a possible interest rate drop. Yet as the day went on, the pound was able to crawl back to post only a small net loss for the day. Industrial production, which was expected to gain 0.2 percent from September to October, actually dropped by 1 percent during the month with a year over year decline of 1.8 percent, 6 times the loss predicted. This is the largest decline in seven months. Manufacturing production, also expected to gain 0.2 percent during October, fell 0.7 percent in the month and 0.9 percent from October 2004. These depressing announcements add to the evidence that the industrial recession seen in the UK may persist despite recent indicators that seemed to hint otherwise. The prospects of a faltering economy have kept traders of the pound on edge as they watch the Bank of England’s policy makers for indications of a move in their rate stance. However, since the August drop, the Bank of England has moved away from even truly considering this policy, staying stagnant at a 4.5 percent target rate as the economy seemed to be stabilizing. Now, with the industrial sector poised to fall back into recession, the option of cutting rates may have re-entered the agenda of the Bank of England. Although it is still widely predicted that they will keep rates unchanged at their meeting this Thursday, a second rate cut may be pending in the near future as the US Fed continues to raise rates.
The Japanese Yen came near its 32 month lows against the dollar and touched record low against the Euro before rebounding. The currency’s continued weakness is being fueled further by comments from Japanese Finance Minister Sadakazu Tanigaki which indicated that officials are not going to resist the slide in the yen. Echoing comments made over the weekend at the G7 meetings in London, Tanigaki indicated that officials were not uncomfortable with the 15 percent decline of the currency thus far. This lack of opposition to the slide, along with a continually widening interest rate differential, opens up the yen to further declines as the dollar nears its largest annual gain against the yen since 1979. Traders shrugged off a seemingly important data release for the yen this morning which showed that overall household spending rose 2 percent from a year earlier during October. Although overall household spending declined by 0.1 percent in a month over month measure, the annual increase was still higher than expected and was the second rise in three months.