we remain puzzled by the Pound

Foreign Currency Exchange Outlook : We get a number of releases today but the focus will be on only one, the Case-Shiller home price index for May, probably a drop by 16% y/y. It was 15.3% in May, hence an acceleration. The Bloomberg survey of 25 economists yields a forecast range of -14.8% to -17%. The index has fallen continuously since Jan 2007. The Bloomberg story notes that the National Association of Realtors said last week that the median price of existing home sales fell 6.1% y/y in June (after 8.5% in April). The discrepancy is explained by different survey coverage and methods.

Oh, really?

The Conference Board consumer confidence index, an hour later at 10 am, will probably drop to 50.1 from 50.4 inJune, says Bloomberg, the lowest since February 1992.

Yesterday the IMF report said the bottom is not yet in sight for US housing. The direct implication is that the bottom is not in sight for defaults and foreclosures, either, even in prime assets, and with credit quality declining in credit card and other bundled securities, banks must continue to shrink their balance sheets. We could even get a nasty shock in the form of additional regional banks failures, although over the weekend at least one bank failed (in Nevada) and it didn’t make the national headlines.

We had a relatively bad day in the financial markets yesterday (oil up, stocks down) but the US Dollar was not sold off. This suggests the market is willing to accept bad news as normal in the US while still feeling shocked by equivalent bad news in the UK and Europe. The US Dollar Japanese Yen exchange rate bottomed last night at 107.26 and has risen steadily to 107.88 so far—will it ever break 108? Judging from bad data in Japan today, the probability is getting higher.

However, we remain puzzled by the Pound. Yes, it fell this morning on the bad mortgage and retail sales news (from 1.9945 near the US close yesterday to 1.9860 this morning) but this is not a big move and it may already be over, having found support at a hand-drawn support line at 1.9860 and starting to rise off it at 8:15 am ET.

The point is probably that the focus is not entirely on the US dollar anymore. Foreign Exchange Traders are willing to consider bad conditions elsewhere. Pressure from the financial sector and economic data keeps the US Dollar Exchange Rates on the defensive, but the absence of favorable data from other countries, including the eurozone, makes the pressure not too hot.

We await a breakout on something, probably GDP in Thursday or payrolls on Friday.

It could be a boring sideways grind until then.

Bye For Now

Barbara Rockefeller