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• British Pound Link to Carry Trades Best Explained by Interest Rate Expectations
• Euro Edges Higher as German Consumer Confidence Improves for Third Straight Month
• New Zealand Dollar the Weakest of the Commodity Bloc Ahead of NZ Trade Results
US Dollar, Japanese Yen Down as US Libor Hits Record Low, New Home Sales Surge - Consumer Confidence on Tuesday
The US dollar and Japanese yen both remained under pressure on Monday as investor sentiment continues to improve, leading to increased demand for higher-yielding currencies, and riskier assets in general. Other evidence of increased confidence comes from the US dollar Libor, as the British Bankers' Association said that the 3-month rate fell to a record low of 0.496 percent from 0.502 percent on July 24, which ultimately indicates an increased willingness to lend. Meanwhile, the low-yielding dollar and yen experienced a short-lived plunge at 10:00 ET after the US Commerce Department reported that new home sales jumped 11 percent in June to an annual pace of 384,000, which brought supply levels down to 8.8 months from 10.2 months, the lowest since October 2007. The surge was especially interesting based on the fact that the average rate on 30-year fixed-rate mortgages rose to a 6-month high of 5.42 percent in June (according to Freddie Mac). However, a 5.8 percent monthly drop and 12 percent annual decline in median prices to $206,200 likely helped to offset the increase in borrowing costs, as well as the Federal Housing Tax Credit of $8000 for first-time home buyers.
Looking ahead to Tuesday, the Conference Board's index of US consumer confidence is anticipated to fall for the second straight month in July, this time down to 49.0 from 49.3. However, based on the drop in the University of Michigan's measure to 66.0 in July from 70.8, there may be potential for tomorrow's report to be somewhat disappointing. That said, US economic data has been surprisingly strong lately, with housing reports showing increased sales and the pace of initial jobless claims down quite a bit from June, suggesting that if the Conference Board's consumer confidence index does indeed drop, it may not be by a large margin. Furthermore, if the index reading inspires optimism amongst investors, US equities could really and the greenback may pull back.
From a technical perspective, the majors at holding near critical levels, and a continuation of the moves we've seen over the past three weeks would signal a break from recent trading ranges. More specifically, on a longer-term basis, the DXY index has held above support from the December 2008 and June 2009 lows near 78.35, EUR/USD has yet to push above falling trendline resistance (connecting the September, December, and June highs) near 1.4250, and GBP/USD is well below the 2009 highs near 1.6700. On a shorter-term basis, GBP/JPY has been unable to push above 157.50 and EUR/JPY faces resistance at 136.00.
British Pound Link to Carry Trades Best Explained by Interest Rate Expectations
There wasn't much in the way of UK data on hand at the start of this week, so why was the British pound the third strongest major currencies (lagging behind the Aussie and Loonie)? With the Bank of England's Bank Rate set at an ultra-low 0.50 percent, yield obviously was not a driver of the British pound. Instead, the currency has been making headway during times of broad-based risk appetite thanks to climbing interest rate expectations. Indeed, according to Credit Suisse overnight index swaps (OIS), the market is pricing in 104.5 basis points worth of rate increases by the BOE over the next 12 months, beating out rate hike expectations for the rest of the central banks for the majors currencies. Just behind the BOE, the Reserve Bank of Australia and the Bank of Canada are projected to hike by 98 basis points and 96.4 basis points, respectively, during the next 12 months.
Interestingly enough, rate expectations for the UK are at their highest since June 11, and it seems like GBP/USD will not be able to break above resistance at 1.6600/1.6700 until OIS start to price in more aggressive increases. At the same time, we have to consider the potential impact of risk trends, as another bout of risk aversion could easily send GBP/USD reversing from its June and July highs.
Related Article: British Pound Weekly Trading Forecast
Euro Edges Higher as German Consumer Confidence Improves for Third Straight Month
The euro gained against many of the majors as the GfK index of German consumer confidence rose for the third straight month in August to a 14-month high of 3.5 from 3.0. The increase was in line with what we saw in the IFO business sentiment reports last week, and reflects other broad improvements in the German services and manufacturing purchasing managers' indices (PMI). Nevertheless, EUR/USD has not been able to push above falling trendline resistance, which connects the September 2008, December 2008, and June 2009 highs near 1.4250. That said, a break of this key resistance point would open the door to more significant gains toward the December high of 1.4720.
Related Article: Euro Weekly Trading Forecast
New Zealand Dollar the Weakest of the Commodity Bloc Ahead of NZ Trade Results
The Australian dollar and Canadian dollar were the strongest of the major currencies, as increased risk appetite drove demand for FX carry trades. However, the New Zealand dollar was the weakest of the commodity dollars as upcoming data is projected to show that New Zealand's trade surplus narrowed to a 5-month low of NZ$215 million in June from NZ$858 million. Indeed, the import balance is expected to edge up to NZ$3.2 billion from NZ$3.1 billion, while the export balance could dip to NZ$3.4 billion from NZ$3.96 billion. As long as the trade balance continues to reflect a surplus, the news shouldn't be too market-moving. However, if exports surprisingly take a heavier hit, sending New Zealand back into a trade deficit, the currency could fall. Key support for NZD/USD sits at 0.6535/50 while resistance looms at 0.6600/31.
Written by: Terri Belkas, Currency Strategist for DailyFX.com