Housing and Unemployment Continue to Weigh on Recovery

While it felt more like the first days of summer instead of spring, the action on our trade desk rose as quickly as the temperature outside. It seemed like the trade of the day was the sale of Japanese yen (JPY) into Singapore dollars (SGD), but it was a busy day all around as many of the commodity currencies and metals kept the phones ringing off the hook. There’s a lot to talk about, so I’ll jump right in.

The housing figures released yesterday definitely disappointed as the sales of previously owned homes in February fell more than originally estimated and sent prices to the lowest levels in nine years. Purchases of homes fell 9.6% on the month from January to an annual figure of 4.88 million as sales fell in all regions. The median price also fell 5.2% from $164,600 to $156,100 as a continuous influx of distressed properties keeps flooding the market.

In fact, distressed properties accounted for 39% of sales and all cash transactions rose to a record 33%. All of this continues to point toward a situation where the typical homebuyer isn’t driving the market, so the fundamentals needed to provide any type of support just aren’t present. As unemployment remains at very high levels, thoughts of additional price drops, and a good number of homeowners who are underwater on their current financing, I just don’t see any type of improvement anytime soon.

As a result of these issues, I saw where RealtyTrac said early in the year they feel foreclosure filings may rise 20% this year. Many borrowers are also having a difficult time finding a mortgage, so there really isn’t anything that points toward a sustained recovery. Like we’ve said for quite a while now, housing depends on employment so until we have a sustained jobs recovery, don’t look for much to change in housing.

Today is set to be a quiet day with US economic figures as we only have two lower tier reports on the docket. One report is another gauge of home prices as we see the Fed Housing Finance price index from January. We have already seen some February figures so this report is kind of pointless, but nonetheless, it’s supposed to remain in negative territory. We also see the March Richmond Fed manufacturing index, which is expected to show a decline from February, and just measures activity in that district.

Moving over into the foreign currency world, it was definitely a risk tolerant day that culminated in a rise of many risk assets, such as currencies, commodities, and equities. Most of the currencies finished the day in positive territory, except for the yen and Swiss franc (CHF) once again, but the commodity currencies topped the list with Australia (AUD), Canada (CAD), and New Zealand (NZD) rounding out the top three.

Before I head to the currencies, the fact that Japan announced progress in cooling the nuclear reactors damaged by the quake and pre-emptive strikes against Qaddafi that has essentially grounded his air force, got things moving along yesterday. While there was at least some type of resolution brought to those geopolitical events, investors felt more comfortable and risk aversion was pushed to the back burner.

Oil rose higher on the day as concerns that the unrest may spread to other Middle Eastern nations, which increased uncertainty, so that put upward pressure on both gold and silver. All three of the assets finished the day higher and some feel that Japan, since it’s the world’s third largest oil consumer, could have a larger impact on the direction of oil longer term.

As I mentioned above, it’s no surprise that the Australian dollar was the big winner yesterday. Its exposure to commodities was the reason for its 1% rise on the day and pushed its way on the other side of parity as thoughts that its selloff may have been overdone began to surface. There weren’t any financial reports or statements from policy makers that prompted the currency rise, so it was strictly a case of higher market risk appetite.

I did find a report from BNP Paribas that calls for the Aussie to trade into the 1.04 handle but it didn’t provide any specific timetable. Their basis was higher commodities, specifically coal, as Australia is the world’s largest coal producer. The report said this is yet another reason the economy would stand to grow well into the future.

When you talk about Australia, it’s usually necessary to mention New Zealand in the same breath. The recent economic news out of New Zealand hasn’t been encouraging as their earthquakes prompted the central bank to cut rates by 0.50% on March 10. While the currency did end the day as one of the best performers, it simply rode the coat tails of the Aussie and higher commodity prices.

Economists have recently lowered GDP expectations in the fiscal year ending March 31, 2012 down to 2% from a 3.5% figure just three months ago. It appears that a weakening of recent activity and a delay in reconstruction are the main culprits and have many calling for rates to remain on hold until at least the fourth quarter. There just isn’t much in the way of strong fundamentals that would justify a stronger currency on its own merit.

The Canadian dollar was the third best currency on the day and rallied on the back of higher oil prices, its largest export. Tomorrow could be interesting as we have the federal budget announcement. However, a house committee recommended the current administration be found in contempt of Parliament for its refusal to fully disclose the cost of measures such as the corporate tax cuts. This isn’t anything that changes its strong economic fundamentals, but rather some internal political differences.

The one currency that you think would have been all over higher commodity prices and risk tolerances was the Brazilian real (BRL). However, it wasn’t able to gain any traction. I think uncertainty on how the government is going to deal with higher inflation is keeping some of the hot money at bay. The minutes of the March central bank meeting indicated that they would rely on raising reserve requirements more instead of rate hikes to address higher inflation.

Since inflation expectations have been continually rising in Brazil, the markets are beginning to think the central bank is already behind the eight ball and hasn’t been proactive enough to contain inflation. Whether the central bank is trying to jawbone the market into thinking interest rates may not go as high as they want, the government still needs to take appropriate steps to deal with the inflation problems before it’s too late.

There was some feeling of relief in the market yesterday as the situation in Japan wasn’t getting worse, which ultimately led to both the yen and franc posting losses. As I was leaving the office last night, the euro (EUR) was still holding on the 1.42 handle as one of Russia’s oil funds was authorized to buy Spanish government bonds. While the markets flip flop on the European debt situation, institutional investors and central banks still show a willingness to invest in the region.

When I came in this morning, the market was trading right about where it was yesterday, as its still holding onto the weaker-dollar bias with the commodity currencies still remaining on top. There hasn’t been much in the way of any meaningful moves overnight, so we’ll see what direction US traders take today. If the past few days are any indication, look for the bias to sell dollars continuing throughout the day, as there isn’t much in the data department to change things up.

To recap… The February existing home sales disappointed by falling more than estimated to a 4.88 million pace, or a 9.6% monthly loss. The big problems for housing have been raising foreclosures and high unemployment. Risk takers were out in force yesterday causing a run up in commodities, equities, and currencies; so the Australian dollar, New Zealand dollar, and Canadian dollar all benefited. Brazilian inflation expectations still remain on the rise.

Mike Meyer
for The Daily Reckoning