Housing data and US Treasury auction the next determinant for dollar direction


MAJOR HEADLINES – PREVIOUS SESSION

  • EU Mar. Industrial New Orders out at -0.8% m/m, -26.9% y/y vs. +0.8%/-30.6% expected

  • US Mar. S&P/Case-Shiller House Price Index out at -18.7% y/y vs. -18.3% expected and -18.67% prior

  • US May Consumer Confidence out at 54.9 vs. 42.6 expected and 40.8 prior

  • US May Richmond Fed Manufacturing Index out at +4 vs. -7 expected and -9 prior

  • US May Dallas Fed manufacturing Index out at -21.5% vs. -22.1% expected and -31.6% prior

  • US Weekly ABC Consumer Confidence out at -47 vs. -45 prior

  • JP Apr. Exports out at -39.1% y/y vs. -42.0% expected and revised -45.5% prior

  • JP Apr. Imports out at -35.8% y/y vs. -36.9% expected and revised -36.6% prior

  • JP Apr Trade Balance out at +Y69.0 bln vs. +Y55.0 bln expected and revised +Y10.3 bln prior

  • AU Mar. Westpac Leading Index out at +0.3% m/m vs. revised -0.5% prior

  • AU May DEWR Skilled Vacancies out at -7.0% m/m vs. revised -9.1% prior

  • AU Q1 Construction Work Done out at -3.7% vs. -3.0% expected and revised +2.3% prior

  • NZ May NBNZ Business Confidence out at 1.9 vs. -14.5 prior

  • JP May Small Business Confidence out at 34.1 vs. 30.8 prior


THEMES TO WATCH – UPCOMING SESSION

  • Sweden Consumer/Manufacturing Confidence (0715)

  • EU ECB’s Noyer speaks (0730)

  • Sweden Trade Balance (0730)

  • Norway Existing Homes (0800)

  • EU ECB’s Bini Smaghi speaks (0830)

  • GE CPI (not specified)

  • US MBA Mortgage Applications (1100)

  • US House Price Index (1400)

  • US Existing Home sales (1400)

  • US FDIC Chairman Bair news conference (1400)

Market Comment:

It was definitely a session of two halves yesterday as an early squeeze for dollar shorts was sharply reversed after a strong rebound in US consumer confidence was reported for May.

Early trading in the European session saw stops being hunted in EUR and GBP, with the former feeling additional pressure from an article in the UK’s Telegraph which highlighted Germany’s potential debt “time-bomb”. EURUSD slid to its lowest since Friday and it looked like further slippage was on the cards after German Q1 GDP was confirmed at -3.8% q/q and the US S&P/Case-Shiller house price index showed a worse-than-expected annual decline in March (-18.7% y/y versus -18.3% expected). Stock markets were in the red and a gloomy air overhung markets.

However, that was all soon to change when US consumer confidence was released. The Conference Board’s index of consumer confidence rose spectacularly, hitting an eight-month high of 54.9 in May and 14 points higher than April’s upwardly revised number of 40.9. More encouraging was the fact that the expectations index rose 21 points compared to the current situation index’s modest 4 point gain. Consumer confidence has now risen for the past 3 months since hitting rock-bottom of 25.3 in February, and indicates that the potential for an economic recovery in H2 2009 exists. All we need now is for other indicators to begin to rebound as well, in particular the “physical” consumer activity rather than sentiment indicators. It is interesting to note that the consumer’s view on the current labour market also showed a bounce, with 5.7% of respondents thinking jobs were plentiful. The medium-term outlook for the labour market showed a stronger rebound, with 20% of respondents expecting more jobs to be around in six months. However, there are still more (25%) who see a deteriorating labour during the same period, likely swayed by the resolute weekly jobless claims numbers staying above the 600k mark.

One other USD positive development was also overlooked in the sell USD/buy equities reaction to the confidence data. Last night’s 2-year Treasury auction was extremely well-received, with a bid/cover ratio for the $40 bln on tap coming in at 2.9 (the highest since September 2007) while indirect investors bought 54% of the issuance (the average is normally around the 30% mark). While it is a good result in the wake of recent negative rumblings, analysts are quick to point out that the 2-year tenor tends to be favoured among investors, and may show more positive traits that may not be matched in the 5- and 7-year tenors. A better picture will be available after tonight’s auction of $35 bln worth of 5-year notes and Thursday’s 7-year auction.

Today’s data releases in Asia were a mixed bag. Japan’s trade data surprised to the upside, posting a Y69.0 surplus in April and recording the third monthly surplus in a row. Encouragingly, a surge in exports was the main highlight, rising 1.9% m/m (the second month of gains) and resulting in a below-forecast annual decline of 39.1% vs. -41.6% expected. More potential signs that “green shoots” may become a global gardening fest. On the other hand, Australian Q1 construction work done remained weak, coming in at a worse-than-expected -3.7%, and could hint that next week’s GDP numbers could indicate that Australia is in its first recession since 1991. Australia’s antipodean neighbour New Zealand saw a strong rebound in business confidence in May. The NBNZ headline measure of business sentiment saw a net 1.9% of respondents now optimistic over the economic outlook over the next 12 months compared with April’s net 14.5% negative result. In addition, a net 3.8% expected their business conditions to improve in the next 12 months compared with April’s net -3.8%.

North Korea was again hitting the headlines in the Asian session with more of its saber-rattling rhetoric. It accused South Korea of declaring war with its participation in the US-led anti-proliferation program and asserted that it was no longer bound by the armistice agreement. North Korean military commented over state radio that it could not guarantee safe passage of ships passing through its western waters, adding that it would strike if provoked. Markets preferred to disregard this news having got the risk appetite bit between the teeth.

Today’s major data release in the session will be the US existing home sales for April, and it is hoped that it will show further signs of stabilization. Median consensus is looking for a 1.8% increase from March’s -3.0%. There still remains the risk for disappointment as house prices continue to slide, labour markets still look uncertain and consumer fundamentals remain weak.