NEWS / Foreign Exchange

Will the House Collapse?

• THE WEEK AHEAD ??“ WILL THE HOUSE COLLAPSE
  
• INFORMA GLOBAL MARKETS CALENDAR FOR THE WEEK AHEAD

THE WEEK AHEAD

 Will the House Collapse?

After collapsing below the 84 level, the FINEX dollar basket broadly traded sideways in nervous markets. However, while the spill over from carry trade carnage appears to have run into exhaustion, US sub-prime mortgage concerns provide a new ghost to haunt the Dollar with the FINEX basket dropping to year to date lows into the end of the week.

In global markets more bereft of such widespread data/events that have characterised the past couple of weeks, the focus narrows to the US. The former in particular will be important in terms of market assessment of risk aversion and the potential lethal implications of contagion from sub-prime shudders. All this leaves US housing data and the FOMC meeting highlighting.

Tuesday and Friday see the US housing releases, the former with February starts and permits, the latter with existing sales. However, the data may be too early to reflect the mortgage financing side of the equation which risks building up the stock of houses and negatively impacting this side of the ecoomic balance sheet. Nonetheless, since August last year the housing side as been on a losing trend. Starts were soft in January while permits also lurched lower after both recovered somewhat in December. While weather factors may impact the February data, the overall indications are that permits in particular have much further to fall to catch "down" with starts. Likewise, the recovery in existing home sales in January - the trend prior to this had been more stable - is unlikely to be maintained. The number could drop to just ahead of the levels of early 2004. With the emphasis on housing, the NAHB March housing index (Monday) and the weekly MBA mortgage applications (Wednesday) jump more into prominence.

All this comes as the FOMC have their two-day meeting Tuesday and Wednesday. While no rate change is expected, the wording of the statement will be instrumental. The last meeting at the end of January saw inflation moderating, although with upside risks, but somewhat firmer growth. But last week's Beige Book was less upbeat on growth with little change in price pressure. Housing was seen as weak but stabilising. Overall, the tone suggested the FOMC slowly moving towards a more neutral position. However, with the Fed monitoring the housing situation, and Fed Governor Bies suggesting that the impact may just be starting, key will be whether this gets a further push along.

The BoJ also meets Monday/Tuesday, plus the regular monthly report and news conference. However, having raised rates last month, most of the steam has been taken out of the board meeting. Nonetheless, the monthly report will provide an ongoing update of the Bank??™s thinking on the economy. The BoJ is likely to maintain its assessment of moderate expansion. Note that markets are closed Wednesday for the Spring Equinox holiday. Thursday??™s MoF Business Outlook will give the latest update on optimism of the business sector in Q1. Manufacturers capital spending plans for FY2007 is an item to watch and strong figures would suggest companies are not worried about the muchfeared exports slowdown. February trade should post a healthy surplus, rebounding from January??™s seasonal low. Friday sees the all industries index which should closely track the tertiary activity. During the week, Japanese markets will also monitor industry data which could give clues on the strength of consumer spending. These include February Tokyo department store sales, department store sales and supermarket sales.

Switching over to the UK, Tuesday and Thursday highlight data-wise with February CPI and retail sales. The BoE minutes of the March policy meeting (rates unchanged) and the 2007/8 budget are on Wednesday. The CPI should stabilise around last month's outturn y/y even though seasonal factors normally lead to a large m/m rise. The steadying of the y/y rate should bring a sigh of relief as it stays below the BoE's 3% upper band. For sales, anecdotal evidence is mixed, but overall should recover from January's sharp m/m dip. The ONS noted that despite the fall, sales continue to remain robust compared with the long term average. The March CBI distributive trades headline (Monday) could fray further after February??™s fall in line with indications from the previous survey. The UK also has March housing data ??“ Hometrack and Rightmove Monday.

But the Minutes could well take precedence, particularly with markets attempting to gauge if, and how imminent, the next BoE rise is. Any upping from the prior month??™s 2 dissenters (serial hawks Besley and Sentance) could see the UK curve price in greater odds for an April hike. BoE Governor King and Deputy Governor Geive are the most likely candidates.

As for the 2007-08 budget, this finalises/updates the financing side of December's pre-budget report. Nearterm the PSNB is likely to remain unchanged, although further out borrowing could be pushed higher. In broad terms the budget and its accompanying forecasts are not expected to provide any shocks, although growth forecasts could be revised higher. The DMO publishes the issuance timetable after the budget. February public sector borrowing is released the previous day with the usual seasonal deficit, but with finances very much in check to meet 2006/07 projections.

Canada also has its Federal budget, this time on Monday. But for FX a more important release is the February CPI data the following day. Seasonal factors exerted some upward pressure on CPI in January, while the core read ticked above the BoC??™s 2% target, and is likely to remain at this level in February. January Retail sales Thursday will also be a key read for the health of this side of the economy. December saw across the board strength with a surprisingly high reads, so the January print is likely to show some give back, but still remain at a relatively healthy clip. Indeed, retail sales have generally been trending sideways around the 6% average over the last twelve months. Into this mix is thrown February leading indicators. (Wednesday). The read could cool slightly but still remain around the trend of recent reads. Overall, there is likely to be little in this data to change the BoC??™s mind on the current policy stance and provide little in the way of domestic impetus for the Loonie.

Elsewhere, there is little to write home about. Norwegian unemployment for January Friday and Swiss February PPI Tuesday. The latter should continue very benign while the former is likely to remain a thorn in the Norges Bank side. Likewise, the Antipodean cupboard is virtually bare with largely second tier data. In Australia, only Q4 dwelling starts are due on Tuesday followed by February new motor vehicle sales, Westpac??™s leading index and DEWR's skilled vacancies index the day after. Over in NZ, the calendar is also thin, with only February migration data due on Tuesday followed by credit card spending on Wednesday.