NEWS / Foreign Exchange

FX Flows Reverse Against Dollar Ahead of Housing

Currency market activity has turned increasingly dollar negative over the last 30 minutes with the dollar falling against all major currencies including the Japanese yen, reflecting broadening concerns with the US economy ahead of the existing home sales. This is unlike the majority of trading patterns when risk appetite/aversion dictates the flows, whereby the dollar is either up against most currencies with the exception of yen, or down across the board with the exception of the yen.

After escalating throughout the US Tuesday trading session, carry trades were curtailed in late Asian trade Wednesday into the European session on reports that US brokerage Merrill Lynch will announce the first loss in 6 years on its sub-prime book. Market cautiousness ahead of this morning??™s US existing home sales is also helping the scaling down of yen crosses and dollar shorts. As a follow up to our Tuesday charts strategy, Aussie was the biggest gainer on strong CPI figures, before erasing more than half of its gains in late Asian trade.

The 10 am release of US existing home sales is expected to show a 4.5% decline in September sales to 5.25 mln units from 5.50 mln units in August. The 17% plunge in August pending sales and the jump in months??™ supply (number of months it takes to sell all unsold existing homes) to 10 months is likely to deliver a bigger decline to as low as 5.10 mln units, well below the consensus forecast of 5.25 mln. Recall that the dismal release of August home sales last month did not weigh on the dollar as the US data showing at the time was relatively robust. Today, however, the story is largely different, with the US economy saddled by fears of inflation, credit turmoil eroding banks earnings and all housing-related figures sustaining continued erosion at every news release, the reaction to a weak report today is likely to induce further dollar selling, especially against the Japanese currency.

Fed funds futues are now pricing a 100% chance of a 25-bp rate cut at next week??™s FOMC meeting, which would take US rates to the same level as those in Canada at 4.50%. A rate cut in December to 4.25%, would narrow the US rate advantage over its Eurozone counterpart to 25-bps, the lowest margin since April 2005. Such broad assault on the dollar??™s interest rate foundation is especially threatening for the currency given the neutral policy outlook of other central banks.

EURUSD eyes 1.4260 as market moves turn dollar-specific

USDJPY reverse on US macro/earnings concerns

Aussie maintains resilience, eyes 23-year high

Loonie extends gains on risk appetite, risks ahead of oil report

Cable held at $2.05

To read this report in its completion, please submit the required information in the link here.