US Dollar Tumbles as Futures Start to Price In a 50bp Cut
After a choppy afternoon of trading, the US dollar finished the day very little changed despite the release of extremely gloomy housing data. Existing home sales plummeted 8.0 percent to 5.04 million during the month of September, the lowest reading since the National Association of Realtors started keeping records in 1999. Single family home sales fared the worst, as they declined 8.6 percent from the month prior, while condo/coop sales fell 4.3 percent as tighter lending standards and higher mortgage rates make it more difficult to get financing. Meanwhile, supply levels rocketed to 10.5 months while the median price on total existing home sales dropped to $211,700 from $224,400. With inventory levels growing and demand clearly waning, it appears that prices will continue to fall much lower. While the greenback didn’t necessarily take the news to heart, fixed income traders apparently did as Fed fund futures now price in an 86 percent chance of a 25 basis point cut on October 31. Though this is slightly lower than yesterday, futures are also starting to price in a 14 percent chance of a 50 basis point cut at the end of the month as it becomes clear just how dire the housing situation has become, especially in regards to its detrimental effects on the US economy. The New Home Sales release on Thursday will likely reinforce that sentiment, as the index is predicted to plummet 3.1 percent to 770K. However, dismal news from the housing sector will not be entirely surprising to the markets and as a result, traders may focus more on the Durable Goods Orders release instead. The headline figure is predicted to improve 1.5 percent and will likely be buoyed by the transportation component, as Boeing reported that orders picked up to 132 in September from 75 during the month prior. Excluding this factor, durable goods orders may only rise a more tepid 0.7 percent, but any surprisingly strong figures could prove beneficial for the Dow, while the US Dollar may continue to be plagued by Fed rate cut speculation.

Is the Euro’s Value Really Hurting the European Economy?
Is the appreciation of the euro negatively impacting businesses in the Euro-zone? It depends on who you ask. The purchasing managers index (PMI) for the manufacturing sector dropped down to a reading of 51.5 from 53.2 as new orders and output lagged amidst softer export demand. While this indicator still indicates expansion, this PMI reading marks the fourth consecutive decline in activity, suggesting the sector is facing a marked slowdown. On the other hand, PMI for the services sector proved to be far more optimistic at 55.6, up from 54.2, as healthy labor markets help fuel domestic demand. The release of the German IFO surveys on Thursday will provide additional information regarding investor sentiment, as indications that businesses remain leery of credit conditions could prevent the ECB from taking on a staunchly hawkish tone.

Commodity Dollars Hold Strong on Hot Aussie CPI, Hawkish RBNZ
The high-yielding New Zealand and Australian dollars held fairly strong as inflation pressures leave both the RBNZ and RBA with a hawkish bias. As was widely expected, the RBNZ left rates steady for the second consecutive month at a record high of 8.25 percent; however, the monetary policy statement signaled a slight tightening bias. Indeed, RBNZ Governor Alan Bollard noted that the "labor market remains tight, domestic income growth continues to expand on the back of strong commodity prices, and core inflationary pressures persist." While Bollard also noted that there were signs that "the housing market is moderating," multiple upside inflation risks suggest that a rate cut is not in the cards in the near-term. Meanwhile, core inflation in Australia accelerated at the fastest pace in 16 years during Q3, sparking speculation that the RBA will hike on November 7. However, there is still a chance that the central bank will hold off on tightening monetary policy, as such a move would likely reduce the odds that Prime Minister John Howard will win the upcoming Federal Election on November 24.

Japanese Yen: Trade Surplus Not as Optimistic as It Appears
The Japanese yen gained some traction as heavy losses in the Dow throughout most of the New York trading session carried pairs like USD/JPY and EUR/JPY lower. Meanwhile, on the surface, Japanese trade balance data looked bullish as the merchandise surplus widened during the month of September to 1.638 trillion yen. However, a breakdown of the figure shows that the increase in the surplus was the result of a 3.2 percent drop in imports, suggesting that spending on the part of businesses and consumers alike in Japan is diminishing. Meanwhile, export growth also eased back as shipments to both the US and Europe have fallen. Nevertheless, demand from other regions in Asia is anticipated to keep trade levels relatively healthy going forward and supports the optimistic claims of various Bank of Japan monetary policy committee members and fiscal officials that expansion is set to keep pace. However, these constantly changing outlooks will not be enough to allow the BOJ to raise rates before year end, given the soft household spending and persistent deflation that the economy faces. Indeed, if the central bank were to pursue further rate normalization regardless of these factors, they would likely exacerbate the current problems and possibly even set the stage for a recession. Thus, we expect them to take a more prudent course and wait until consumer price growth turns positive once again and economic conditions stabilize before even considering taking their ultra-low benchmark lending rate from 0.50 percent to 0.75 percent.

Kathy Lien is the Chief Currency Strategist at FXCM.