Dollar Awaits Whether Housing Will Start

Focus shifts to the US housing market with the 8.30 am release of May housing starts and building permits. Starts are expected to have dropped to 1.472 mln from 1.528 mln in April, while permits are seen up to 1.470 mln from 1.458 mln in April. Yesterday, the housing market index fell to 28 in June from 30 in May, extending its declines to the lowest level since February 1991. The expected rebound in building permits may not necessarily help the dollar as the rebound is seen emerging from April??�s low figure, which is the lowest since June 1997 and the 10th straight decline. Considering the ongoing decrease in building permits, future housing starts could well be expected to show further declines, which would broaden the weakness construction jobs. The starts/permits figures will also set the tone for expectations for the next week??�s releases of new and existing home sales.

Euro breaks above 1.34, targets 1.3430

Germany??�s ZEW survey on investor sentiment fell to 20.3 in June from May??�s 24.0, well below expectations of 29. The current conditions indicator slipped to 88.7 from 88.0 versus expectations of no change. Despite the retreat in the survey, there is no retreat in expectations for a summer rate hike from the ECB. The euro has charted a convincing upward technical path after ending the NY session well above the 1.34 figure and reaching our projected target of 1.3430.

The path for further gains remains possible on the back of what could be renewed concerns with the US housing in the event that we see a decline in housing starts. A decline in both building permits and housing starts could or a decline in only housing starts could lift the euro past the 1.3430s and onto the 1.3450 resistance, which is the 61.8% retracement of the 1.3553-1.3262 move. But we warn of renewed euro downside pressure in the event that US stocks decline by more than 1.0%. Support stands at 1.3375, followed by 1.3350.

USDJPY eyes 123 in short term

USDJPY pushed higher after Bank of Japan Governor Fukui hit the wires overnight making no changes to market??�s interpretation that interest rates will remain on hold this summer. We do not expect a rate hike before September, at which point uncertainty would have been cleared following next month??�s parliamentary elections. Over 26% respondents polled said they would vote for the main opposition party Democratic Party as the incumbent Liberal Democratic Party is mired in a series of scandals and plummeting popularity of Prime Minister Abe.

We continue to see a bearish divergence in the 4-hour chart, which foresees a decline towards the 123.30 support. This morning??�s US housing data may well be the catalyst for triggering further selling to as low as 123.10. But any upside surprise in housing starts should help weigh on the already beleaguered yen and trigger further risk appetite. This is likely to lift the pair towards the 123.65 resistance, followed by 124. We continue to see the long term resistance at 124.89, which is the 50% retracement of the major decline from the 147.98 high (August 1998) to the 101.24 low (November 1999).

CAD rises as CPI remains above target

The Canadian dollar is up across the board after the May CPI data showed a slowdown that may not be sufficient to prevent the Bank of Canada from raising rates next month. The annual core CPI slowed to 2.2% y/y from 2.5%, weaker than expectations of 2.3%, while the headline figure seen unchanged was unchanged at 2.2%. Both figures stand above the central bank??�s 2.0% target. Today??�s figures should further fuel the debate on whether the strong Canadian dollar would dissuade the central bank from pulling the trigger next month. This week??�s retail sales will be key in determining these expectations.

We are not quick to jump on calling for a July rate hike due to the ensuing strains in Canada??�s manufacturing, but expectations of a tightening later in the year will help boost the currency.

USDCAD breaks below 1.07 to 1.0670, now facing interim target at 1.0630. Key target stands at 1.0605. Upside capped at 1.0730, a break of which is only expected from an upside an erosion in US stocks. Subsequent resistance stands at 1.0760.

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