Saturday, November 18, 2006

Forex News: Weak Data Is Only Beginning to Hurt the US Dollar

Forex News

Action speaks a lot louder than words and even though the NAHB housing market index reported stronger sentiment among builders yesterday, the sharp drop in housing starts and applications for building permits that were reported today basically nullified the previous release. The number of new building projects that broke ground in the month October fell to a six year low as demand wanes and cancellation becomes the new buzz word in real estate. Building permits also fell for the eighth straight month, indicating that there are even fewer projects in the pipeline. The surprising rise in the NAHB index was the primary reason why the dollar managed to rally yesterday in the face of weaker economic data. The market thought that the housing sector was bottoming out, when it really isn’t. We had a tremendous amount of data released over the past week and we have learned that even though the Fed remains hawkish, the trade picture was worse than expected, inflationary pressures are falling, the housing market remains fragile and consumer spending is beginning to see some real signs of weakness. None of this is good news for the US dollar and should push the Federal Reserve further away from their current stance and give them no choice but to be more neutral with their take on inflation and outlook for monetary policy. The lack of economic data next week should keep the market relatively range bound. Volatilities are low and will probably continue to remain low. However, aside from the drop in the Japanese Yen crosses, there are growing signs that the carry trade faces risk – see our Japanese Yen section for more details. Meanwhile aside from leading indicators, there is nothing of consequence on the US calendar next week. It will also be a shortened trading week with the US markets closed for Thanksgiving Day on Thursday.


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