Talking Points
• Yen: Japanese housing market still feeling impact of building permit reforms
• Pound: UK mortgage equity withdrawals fueled consumption during Q3
• Euro: Making a test of 1.45 – Can it break higher?
• US Dollar: Softening ahead of Durable Goods orders
As traders slowly filtered back into the markets, the US Dollar continued to lose steam against the Euro and British Pound amidst low volumes and thin data. The USD/JPY pair did manage to hold up above the 114 level, however, as Japanese economic news proved to be dour (Visit our recently updated Japanese Yen Currency Room for specific resources geared towards this currency).
Indeed, housing starts tumbled 27 percent in November from a year ago - marking the fifth consecutive month of declines - as tighter standards for obtaining building permits exert a drag on growth throughout the sector. Furthermore, the plunge in housing investment erased 1 percentage point from Q3 GDP, and also led the Cabinet Office to slash its GDP forecast for the year to 1.3 percent from 2.1 percent. Recently, Prime Minister Yasuo Fukuda said that he regretted the results of the building-code changes made in June in response to fraudulent earthquake-resistance data from an architect. Meanwhile, builders had complained that the new system was introduced too quickly, leaving them little time to adapt to the requirements. With the housing sector remaining vulnerable, consumer spending still weak, and with business sentiment and capital expenditures softening, it is rather clear that the Bank of Japan has no room to normalize rates further.
Meanwhile, the Bank of England reported this morning that housing equity withdrawals during the third quarter surprisingly rose 10.5 billion pounds from 10.1 billion pounds during the second quarter, as homeowners borrowed against their mortgages even as house price growth slowed. This helps to explain how consumption managed to remain resilient during the third quarter, but this trend may not hold as UK housing indicators have recently reflected a stalling in the market during the fourth quarter. In fact, the British Bankers' Association said this morning that mortgage lending slumped to 4.3 billion pounds in November, down from 4.8 billion during the month prior. This comes as little surprise as lending standards tighten, interest rates remain high, and properties remain unaffordable. Furthermore, this will be of some comfort to the Bank of England, as the monetary policy committee maintains a dovish bias.
Looking ahead to this morning, US durable goods orders are expected to rebound quite a bit in November, which may help to offset some of the gloomy sentiment in the equity markets surrounding disappointing holiday sales. Nevertheless, a surprisingly weak report could trigger a sell-off in the Dow and exacerbate the greenback’s recent losses.
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