Horrific US New Home Sales — Reduce Risk

The 32.7% decline in new homes sales to a new cyclical low has actually sparked a bout of dollar and yen buying on risk aversion. The revisions to the March and April time series also point to a much weaker picture than we had.   The dollar had already turned better bid before the news as the equity market failed to hold initial gains, but the news has seen the dollar’s rise accelerate.

Euro support is seen near $1.2200. It has not traded below there since June 15.  The 20-day moving average comes in near there as well.  A break of there could force out some of the short-term operators who had begun playing the euro from the long side and spur a move back to $1.21.

Sterling continues to hold in there.  Though it is nearly a cent off its earlier highs, it is still drawing support from the budget reaction including two of the three rating agencies suggesting it strengthens the country’s AAA status.

The Australian dollar initially rallied on news that Rudd may resign, but despite the news headlines, it is not a done deal and PM Rudd seems to be willing to take on the challenge from his deputy.  The Australian dollar has also fallen nearly a cent from its highs as risk is unwound.   Support is seen near $0.8650.

The Canadian dollar is the poorest performer of the majors.  The much weaker than expected retail sales (April -2.0% vs consensus of -0.4%)  It is the first decline in Canadian retail sales since mid-Q4 09.  It is hard to simply dismiss the report on the early Easter and warm weather influences, though they probably played a part.  The key is 1) the short-term market was long CAD, looking for a test on parity and 2) Canadian prime dealers expected a rate hike at the next BOC meeting on July 20.  Both, market positions and the rate hike, must be reconsidered.  The FOMC is likely to tweak its growth assessment lower and although the BBK revised up German growth this year, international and financial factors are somewhat less supportive.