Not so long ago the US was perceived to be lagging behind the rest of the world recovering from the crisis much slower than other G7 nations. As a result the Dollar was pushed south rather vigorously with the grim growth outlook constantly looming. However recent data shows this might not be the case as some key indicators surprised for the better. The US GDP rose 2.2% for Q3 in an annual pace and both ISM Manufacturing and consumer confidence held above the 50 mark. Most importantly unemployment is showing signs of stabilizing with initial Jobless claims holding under 500K and unemployment steady at 10%.With the UK economic performance lagging and sovereign default of Spain, Portugal and Greece weighing on the EU, shorting the dollar is no longer the obvious choice. Already consensus bets are slowly shifting towards the Dollar. The Greenback rebounded from its lows gaining since December 7.5% and 4% against the Euro and the Pound respectively.
The Fed– one of the strongest factors influencing Dollar bets in becoming more optimistic on the US economy. Although the Fed continues to stress rates in the US will be extremely low for a pronged period the Fed is actually tightening monetary conditions by other means. The Fed ended its Quantitative Easing program which was aimed to assist credit moreover the Fed declared its mortgage securities purchase will end in March. Both pose liquidity facilities intended to tackle the tight credit conditions, ending both means the Fed will print less Dollars and outlines the Fed is bullish on the economy, signaling the economy can stand on its own feet. Yesterday in the Fed rate decision Fed Chairman Ben Bernanke kept his pledge to leave rates low and left the key rate unchanged at a record low of 0.25%.Nevertheless when examining the rhetoric of the statement it Is evident the Fed is becoming more bullish on the economy. The Chairman announced that the Fed’s mortgage backed securities purchasing program of $1.43 Trillion will end in March as planned and expressed optimism by stressing that economic activity continues to improve. The chairman also changed its rhetoric on inflation calling inflation prospects as likely to remain moderate rather weak as it previously stated, a slight improvement pointing the Fed no longer sees inflation as completely out of the question. The Dollar reacted with a modest gain but was able to dip under the 1.4$ key barrier against the euro.
The Housing Market still the largest risk–Although the Fed statement yesterday was rather bullish on the economy one thing grabbed investors attention, the Fed did not relate to the housing market. It seems that the Fed intentionally avoided any statements with respect to the housing market amid the planned exit of MBS program (Mortgage Backed securities). In fact when examining the latest figures coming out of the housing market with new homes sales falling 7.6% MoM and existing home sales falling a staggering -16.7% MoM it is not surprising the Fed avoided relating to the housing market . Relating to the weak figures could panic over the Fed’s exit program.A panic the Fed is more than interested to avoid.
Why are investors concerned so much from weakness in the housing market? The largest banks in the US have gigantic exposures to the housing markets if the housing market continues to deteriorate credit delinquencies will rise and the pressure on US banks will mount. The result will be tighter credit conditions and a grave risk to the entire recovery process.
Ahead of tomorrow’s GDP figure, is it time to bet on the buck?
For the Short Term– Consensus bets point to an expected 4.6% growth in an annual pace. If the figure will be within the range of consensus the Dollar move to break above current levels will be in place. If GDP will disappoint this could invite a correction in the Dollar after rallying in the last few weeks. The Dollar will be pushed to lower levels to regain momentum.
For the Long term-Watch for unemployment and existing home sales, since only a continuous improvement in both indicators will set the stage for a long term monetary tightening by the Fed. A rise in existing home sales signals home stocks are getting lower hence prospects for the whole real-estate sector will improve and banks will feel more comfortable to fuel businesses with credit. A fall in unemployment has always been a preliminary condition for the Fed to raise rates after a recession. If both will improve the possibility of a rate hike will become more imminent and Dollar bets will become more crowded.
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