US Dollar Slips Despite Increased Homebuilder Confidence, Mixed Comments by Treasury’s Geithner

The US dollar lost ground on Monday as increased risk appetite fed increased demand for FX carry trades, commodities like oil, and equities, as the S&P 500 ended the day up 3.04 percent at 909.71. While there weren’t any top tier economic indicators on hand, US news was generally optimistic. Indeed, Treasury Secretary Tim Geithner said in comments at the National Press Club that the credit markets are thawing, that the economy has “clearly stabilized” but remains “fragile,” and also said that unemployment may keep rising even if growth rebounds. Geithner went on to say that the government shouldn’t set caps on compensation and should instead focus on pay incentives, which must be tied to “long term factors” rather than encourage an increase in short-term risk. On the government’s massive budget deficit, Geithner noted that it would be the “defining challenge” of the next five years as the nation’s fiscal conditions is “unsustainable.”

Meanwhile, the National Association of Home Builders (NAHB) index rose to 16 in the month of May from 14, the highest since September, indicating that confidence amongst homebuilders is improving. That said, readings below 50 signal that the majority views conditions as remaining poor, suggesting that the US housing sector remains far from recovery. However, upcoming data may show signs of improvement for the month of April after staging a sharp deterioration in March. Indeed, the US Commerce Department's housing starts index is projected to edge up to 520,000 from 510,000 while applications for building permits may increase to 530,000 from a record low of 516,000. Such moves would bode well for next week's release of NAR existing home sales and Commerce Department's new home sales, as the reports tend to correlate from month to month. Better-than-expected readings could offer a boost to risk appetite, which may ultimately benefit FX carry trades and stock market futures, while disappointing readings may lead to US dollar gains amidst flight-to-safety.

Euro Bounces Against Dollar, Yen, But Euro Crosses Remain Confined to Tight Ranges

The euro made headway against the US dollar and Japanese yen, as EUR/USD broke above 1.3540/45 and EUR/JPY bounced from rising trendline support on the daily charts. However, when it came to the rest of the majors, the currency was a laggard, with EUR/CHF backing off from falling trendline resistance at 1.5150 and EUR/GBP holding within a range of 0.8800-0.9025. Euro-zone economic data was better-than-expected, as the region’s trade deficit narrowed to 2.1 billion euros in March from 2.9 billion euros thanks to a 1.4 percent increase in exports. Adding to this, imports rose 0.6 percent, suggesting that both foreign and domestic demand are starting to improve, albeit at a very slow pace.

On Tuesday, the release of the German ZEW survey of investor sentiment for the month of May is anticipated to reflect mixed sentiment on current conditions and the economic outlook. Indeed, the index of sentiment on the current situation is forecasted to remain near 5-year lows at -90.0, up from -91.6 while the outlook is projected to rise to +20 from +13. This report can be market-moving for the euro on a very short-term basis upon release at 5:00 ET, with disappointing results likely to weigh on the currency. On the other hand, better-than-expected data could provide a bit of a boost for the euro.

British Pound Trading Below 1.5350 Ahead of Key UK CPI Report on Tuesday

The British pound tested last week’s highs against the US dollar near 1.5350, but with FXCM SSI showing that traders remain let long GBP/USD by a ratio of over 2:1, the contrarian indicator suggests an intermediate top may be in place (learn more about SSI at the end of last week’s update). Interestingly enough, event risk for GBP/USD will pick up tomorrow as the UK’s consumer price index (CPI) reading for the month of April is expected to rise 0.4 percent, the third straight increase. However, the annual rate of growth, which is more closely watched by the Bank of England, is forecasted to fall to a more than one-year low of 2.4 percent from 2.9 percent, keeping inflation within the central bank’s acceptable range of 1 percent - 3 percent, but above their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further. On the other hand, if CPI holds strong, the currency could rally in response.

Japanese Yen Down as FX Carry Trades Surge - Watch for Japanese GDP on Tuesday Night

The Japanese yen was the weakest of the majors on a day that risk appetite lifted FX carry trades, making it all the more clear that fundamentals are not driving price action for currencies like the yen and the US dollar. This point could be highlighted tomorrow night, when Japan's Cabinet Office will release preliminary growth readings. After three consecutive quarters of contraction, the outlook doesn't look good. There are signs that businesses are suffering considerably at the hands of waning domestic and foreign demand. Consumers have very little to work with these days, as the jobless rate has slowly climbed to a nearly five-year high, and perhaps even worse, cash earnings growth contracted by 3.7 percent in March from a year earlier, the sharpest drop since 2002. Meanwhile, Japanese exporters have had to grapple with not only slowing global growth, but also the appreciation of the Japanese yen, all of which has led foreign-bound shipments to tumble a whopping 46.5 percent in March from a year ago, according to figures published by the Ministry of Finance. As a result, a Bloomberg News poll of economists shows expectations for GDP to fall 4.3 percent in Q1, with the annualized rate forecasted to plummet by a record 16.1 percent.

Terri Belkas is a Currency Strategist at FXCM.