Outlook
We need to acknowledge three data developments—German consumer and business confidence is being weakened by the Ukraine situation, and the US recovery is showing signs of sluggishness. Yesterday’s new home sales are an important case in point (and maybe the IMF is right that growth will be a measly 1.7% this year). New home sales fell 4.9% y/y in the first half of the year, and 8.1% m/m in June alone. In addition to low wage growth and tighter mortgage standards, would-be buyers are priced out of the new home market, where the latest median price is $273,500, up 17.6% over the past two years and 22% over the median for an existing home. The slump in new home sales is a drag on employment and construction goods, not to mention sentiment. A possible antidote is to-day’s durable goods orders, forecast up 0.5% after a decline by 0.9% in May, according to Bloomberg.
The third data set to heed is conditions in Russia. The Russian central bank raised rates today by 50 bp to 8% and threat-ened more if inflation risk remains high. It’s the third hike in 5 months and was not expected. The MICEX fell 1.4%. The ostensible reason is to fight inflation (which can only get worse if the third round of sanctions are applied) but it could be a preemptive move against capital flight, too. It’s obvious that unless Russia imposes capital controls, capital flight is in the cards by both foreigners and domestic investors.
Next week’s data will determine whether the dollar rally is susceptible to so much profit-taking that a major correction takes hold. The first bit of data is today’s durables, which contributes to GDP. Next week’s GDP will be 2.9%, according to the Bloomberg survey, more than outweighing the Q1 contraction. Job growth next Friday will be 200,000+. Many analysts say we are still in a period of high uncertainty and the dollar is by no means assured of a continuing rise. We say the chart shows something else—the euro is starting to get hit by Ukraine/Russia, which even German economists acknowledge in trying to brush off sub-par data. Since it seems clear that Putin is not backing off and is instead heating things up—how macho!—Europe has to stiffen its spine. Europe also has to face a serious threat to growth and prosperi-ty for the second time in under a decade, the first having been the peripheral debt crisis. How much can a currency take? We feel more optimistic about a long dollar position going into next week.
Note to Readers: We will not publish any reports starting next Thursday, July 31 to Wednesday, Au-gust 6. It’s the first time in over 20 years we will not cover the payrolls report. Remember: spikes, often two-way. Stay away,
This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.
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