Home Builder Sentiment Underpins US Dollar

 | Aug 19, 2014 04:54AM ET

The dollar gained broadly over the past 24 hours, boosted by better-than-expected figures from the National Association of Home Builders.

The only G10 currency to gain vs USD was AUD, which rose after the Reserve Bank of Australia (RBA) released the minutes of its latest policy meeting. This seems almost inexplicable to me, given that the minutes emphasized the uncertainties ahead and the difficulties caused by the strong currency. About the only explanation I can think of is that it said “cumulative movements in interest rates since the start of the year amounted to a noticeable easing in financial conditions,” which could be interpreted as making future rate cuts less likely. But in my view, that line was outweighed by comments about the “significant uncertainties around the growth forecast and the importance of considering the risks to the forecast…” especially after the RBA cut its forecasts for growth in the August Statement on Monetary Policy. Personally, I would fade this rally as I think it is ill-founded and could be reversed tomorrow, when RBA Gov. Stevens presents his semi-annual testimony to the House of Representatives Economics Committee. (See technical comment below).

On the other hand, NZD was the weakest of the G10 currencies after the PPI fell on a qoq basis and the government cut its forecasts for economic growth and government budget surpluses. I’ve been bullish on NZD based on expected Chinese demand for its commodities, and indeed Chinese purchases of milk continue to be strong. China now consumes over half the world’s whole-milk powder, New Zealand’s biggest export. However this demand hasn’t been enough to shore up milk prices, which recently hit a two-year low. I am resigned to a period of NZD weakness until milk demand recovers enough to start boosting prices.

In contrast to its general gains against the G10 currencies, the dollar was mixed vs EM as carry trades continue to attract selective attention. The traditional carry currencies BRL and TRY gained, but another carry favorite – ZAR – was the worst performing of the EM currencies we track, so it cannot be said to be an indiscriminate move into carry trades. The biggest gainer was RUB, which rose as tensions in Ukraine subsided a bit. The gains did not extend to other Eastern European currencies though as HUF and CZK fell (but only against USD – they were higher vs EUR). The USD/PLN was fairly steady, meaning EUR/PLN was lower. In other words, the Eastern European currencies are coming back but their strength is masked by the rise in the dollar. Investors interested in putting on carry trades might want to look at buying them vs EUR or JPY. PLN and HUF pay much lower interest than RUB, but they are better underpinned fundamentally as oil prices come down and only indirectly exposed to events in Ukraine.

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Today’s schedule: During the European day, the only indicator we get is the single currency bloc’s current account for June. The region’s large current account surplus is one reason for the strong EUR, although the report tends not to be market-moving. The Eurozone trade figures out Monday had no impact on the currency.

In the UK, the CPI is forecast to have slowed a bit to +1.8% yoy in July from +1.9% yoy in June, while the nation’s PPI for the same period is forecast to have remained unchanged. Last month GBP/USD rose approximately 0.40% at the release of the unexpected high CPI reading, boosting the case for the Bank of England to increase interest rates. This month however the expected slowdown in inflation adds to the growing body of evidence that the UK economy is losing momentum. Only the BoE meeting minutes on Wednesday may be able to reverse this view.

In the US, the CPI for July is expected to slow down in pace to +2.0% yoy, from +2.1% yoy in the previous month. While inflation at the Fed’s target rate might normally be expected to boost the dollar, at this point I think the focus is on the employment data, not the inflation data, and I wouldn’t expect this figure to be market-affecting. Housing starts and building permits for July are also coming out. Both figures are forecast to have increased, adding to the evidence of strength in the housing market from Monday’s better-than-expected NAHB survey.