Dollar: Dow Reverses, Taking Everything Down With it
The US dollar is stronger against ever major currency with exception of the Japanese Yen. Although it would be easy to attribute the dollar’s rally today to the 16 percent rise in new home sales and the sharp increase in durable goods orders excluding transportation, that attribution would not be entirely accurate. If you took a closer look at the intraday price charts, the EUR/USD ended the US session not far from the level it traded at between 8:30am and 10:00am EST. What is driving the move lower in the EUR/USD and pairs like the AUD/USD and NZD/USD is actually carry trade liquidation. Liquidation out of AUD/JPY, NZD/JPY, EUR/JPY and GBP/JPY has inflicted pain onto the majors. The sell-off was triggered by a sharp intraday reversal in the US stock market. Having been up as much as 100 points after the housing numbers, the Dow ended the day down 84 points. It took the market some time to realize that the strong housing numbers released this morning contained underlying weakness. Even though new home sales jumped 16 percent in the month of April, the biggest rise in 14 years, the median price of homes dropped 10.9 percent, the largest on record. This means that builders, especially corporate ones are in a rush to recoup their investments by having a fire sale on inventory. We already know that they are very pessimistic about the outlook for the housing market and with even more inventory coming onto the market within the next year (here in NY, there are new buildings construction happening on almost every block), these builders must feel a strong urgency to sell. This makes tomorrow’s existing home sale figures exceptionally important. Existing home owners are generally in less of a rush to sell, can be more price sensitive and able to wait longer for a favorable offer than builders. Should existing home sales also increase strongly, then the housing market may be on its way to recovery. If it sees a sharp decrease in sales, then trouble could be ahead. Durable goods were less ambiguous as the upward revisions to the headline figure last month offset the smaller than expected rise this month. Orders excluding transportation also doubled expectations, indicating that the weak dollar is benefiting the sector as a whole. With no clear direction on where the economy is headed, the one thing that is clear is that the reversal in the Dow is having a big impact on the currency market and should stocks continue to fall, then we could see the crosses lead to more weakness in the majors.

Euro: IFO in line, Saves the Euro from a Major Decline
The Euro was left out of the big moves today as the currency remained trapped within a 50 pip trading range against the US dollar. The much awaited German IFO report proved to be a non-event with business sentiment holding steady in the month of May. Even though the assessment of current conditions was downgraded slightly, businesses were more optimistic about conditions ahead. The lofty levels of the German business sentiment index and the ZEW analyst sentiment survey continue to illustrate the region’s economic resilience. The prospect of another rate hike by the ECB has limited any major decline in the currency. Meanwhile Swiss employment numbers were also released this morning. The level of employment continues to grow with the employment rate ticking up from 1.6 to 1.8 percent. A healthy labor market and strong retail sales should help to boost the Swiss KoF leading indicators for the month of May while the weak franc should have helped to boost trade in the month of April.

British Pound: Still Holding Strong Thanks to the MPC Minutes
The British pound held up exceptionally well despite broad dollar strength. With the lack of any meaningful economic data, the currency is riding on the coattails of yesterday’s hawkish monetary policy meeting minutes. With the minutes alluding to the possibility of another interest rate hike in July or August, traders have reversed a good portion of their pound shorts. This reflects the increasing number of economists now calling for 6.00 percent rates by year end. That may be a bit optimistic given recent retail sales and inflation data. The only piece of UK data released today was the CBI Distributive Trades Survey for the month of May, which increased from +5 to +2. Tomorrow we have UK GDP due for release. There are no major changes expected to be made to the second release of first quarter GDP.

Japanese Yen: Watch Out for Follow through in Asia
The Japanese Yen continued to weaken significantly on the weight of carry trade liquidation. Yesterday we warned that a 100 point move lower in the Dow would have a broad sweeping impact on these interest rate plays. Today, even though the Dow is not down 100 points, it did move 180 points intraday. If the exodus out of stocks continues in Asia, then the sell-off that we have seen in the Yen crosses today could continue. The only piece of data released last night was the trade balance. A disappointment in the trade surplus was offset by a jump in the seasonal balance in the month of April. Tomorrow we have consumer prices due for release. The rise in the CGPI index suggests that we could see stronger inflation growth, which would help to exacerbate the moves lower in the yen crosses.

Commodity Currencies Sell-Off as Gold and Oil Prices Turn
The Australian, New Zealand and Canadian dollars are all lower across the board. A turn in the commodity markets and liquidation out of these high yielding assets has contributed to the sell-off. Last night, the New Zealand trade surplus turned into a deficit. As we have warned, the strong level of the Kiwi and weakness in commodity prices (like cattle) has taken a big bite out of exports. Even though there are no more economic data due for release from the region this week, the commodity currencies will be a big focus with Canada set to decide on interest rates. The CD Howe Institute of Canada recommended today that the central bank raise rates by 25bp to 4.50 percent next week. We think that this is unlikely because even though the economy has been performing very well, the central bank will not want to risk spurring more speculation and demand for their currency by raising rates as it would assure the Canadian dollar’s move to parity.

John Kicklighter is a Currency Strategist at FXCM.