After an initial spike in equity futures as a result of stronger than expected manufacturing activity in China, financial markets were relatively calm for the remainder of the North American session, unable to generate any positive momentum with the S&P closing flat on the day. Despite better than expected economic data out of the US after both Existing Home Sales and Markit’s Flash Manufacturing PMI report beat the median analyst forecast, the DXY was unimpressed, and failed to make a break to the upside out of the low-80s. The Loonie spent most of its day within a tight range after a taking another leg higher to begin the new week, though good demand from corporate hedgers has helped USDCAD slide remain supported in the low 1.07s thus far. Canada’s new Finance Minister Joe Oliver is in London to promote trade and investment this week, and in an interview said the recent strength in the CAD against its American counterpart is more a function of higher oil prices rather than market concerns about higher inflation and the risk the Central Bank is closer to changing its stance towards interest rates. As we’ve mentioned in this commentary on a few occasions, the correlation between the Loonie and international oil prices has increased recently, making price developments in the domestic currency more susceptible to changes in hydrocarbon supply. While the recent escalation of violence and conflict in Iraq have led to higher oil prices that have attracted hot money flows into Canada, market participants should be wary an unwind could occur at similar speeds, especially considering the fluid nature of geopolitical conflicts.
Overnight price action in currency markets was dominated by developments in Europe, as members of the Bank of England were testifying in front of the Treasury Select Committee on the outlook for inflation and the economy. Governor Carney, and MPC members Weale and Bean all highlighted there is still slack in the economy that needs to be absorbed before any upward movement on rates can occur. The failure to reiterate Carney’s hawkish warnings from his Mansion House speech two weeks ago has seen Cable dip this morning as traders seize the profit-taking opportunity. Like the Fed, the BoE has established itself as being data dependent in regards to deciding when to begin the process of a normalization in borrowing rates, and thus will be placing more weight on ancillary indicators like wage growth when assessing labour market slack. The dip in GBPUSD below the 1.70 handle has been shallow enough the stronger long Pound positions have remained steadfast, with traders looking towards Thursday’s Financial Stability Report and the macro-prudential policies that could be recommended to curb some of the speculative froth that is beginning to build in the housing market.
The associated outflows generated from the slide in Cable have been partially diverted to the Euro, which has helped the common-currency unit stay afloat this morning after a softer than expected German Ifo reading. The survey on business conditions for the largest economy in the economic union slid to 109.7 compared to the 110.4 registered in May, and the 110.3 analysts had been expected. The current conditions sub-component didn’t see much movement from last month’s results, with the future expectations sub-index weighing down the overall reading as it dropped from 106.2 to 104.8.  As has been communicated via other reports such as the recent PMI readings for Germany, the backstop of the Eurozone continues to trudge ahead, though momentum appears to be faltering as confidence in the future economic conditions is questioned. The EUR has managed to propel itself above the 1.36 handle against the USD this morning, the strength a function of cross-currency price action versus the fundamental picture for the zone.
Heading into the North American open, equity futures are showing a slightly red tinge before the opening bell, with stocks looking set to see a continuation of their consolidation from yesterday. Brent managed to find some supportive bids after dropping through the $114/barrel handle yesterday as victories for the Iraqi army over the insurgents gave market participants a signal the nation’s oil supplies may not be disrupted and led to oil’s decline. Also seeing some steam come out of oil’s rally was the fact that Putin and Ukraine are getting closer to approving a resolution to end the violence in Eastern Ukraine, a de-escalation of tensions that would surely calm the geopolitical environment. On the economic data side of things, US housing prices as measured by the CaseShiller index saw their y/o/y advance moderate to 10.8%, slower than the 12.4% registered in March and the 11.6% expected for April. The softer housing prices have taken some pep out of the DXY’s step this morning, though the Loonie remains relatively stable against the USD, with USDCAD pivoting in the low-1.07s.
Looking ahead to the remainder of the session, New Home Sales in May for the US are set to drop at 10:00EST. While housing prices showed some moderation over the month of April, New Home Sales are expected to follow suit from the upbeat Existing Home Sales number that hit the wires yesterday and come in with an annualized reading of 0.44M.  The half a million mark has been a tough number for the housing industry to overcome since coming off the lows in 2010, and will be a major swing point to illustrate how much momentum the industry was carrying forward into the latter half of the second quarter.  It is likely we’ll need to see a break of the plateau that has stunted the housing industry’s forward progress before the Fed changes its language surrounding the accommodating stance towards monetary policy conditions once the taper is complete, and will therefore be an important influence of the USD and the major currency pairs in the coming months.
Further reading:
New Home Sales
EUR/USD – Euro Shrugs Off Disapointing German Business Confidence
