Strong Euro Could Delay ECB Rate Hike (page 1 of 2)

DailyFX Fundamentals 07-03-07

By Kathy Lien, Chief Strategist of DailyFX.com

Dollar Unfazed by Drop in Pending Home Sales and Hudson Employment Index

The US dollar has recovered from Monday's sharp losses, thanks to profit taking and position squaring ahead of the Independence Day holiday.

Even though trading tomorrow should be quiet, traders should not become complacent, because we still have very important and market moving data scheduled for Thursday and Friday.

The recent deterioration in the housing market makes job growth last month particularly important. Pending home sales dropped to the lowest level in five years during May, which suggests that existing home sales in June could continue to remain weak.

Potential homebuyers are either facing difficulty getting mortgages or are simply holding out for lower prices, neither of which provide a promising outlook for the housing market.

However the long held belief has been that as long as people in the US have jobs, they will prevent the housing market from collapsing by continuing to service their mortgages. The market expects job growth to slow in June, but economists may be underestimating the potential decline.

The Hudson employment index plunged six points last month to 101.2, the lowest level of job growth in nine months. This follows a drop in the employment component of the manufacturing ISM report that was released on Monday.

Service sector ISM and the ADP release will shed more light on how bad Friday's non-farm payrolls number could be, but at this point the leading indicators for payrolls that we typically look at suggest that job growth could be weaker than most people are expecting.

Be Careful of Reserve Bank of New Zealand Intervention, Australia Rate Decision Should be Non-Event

Central banks love to intervene in the markets when liquidity is low because that is when they will get the most 'bang for the buck'.

For the Reserve Bank of New Zealand (RBNZ), this is particularly important because their war chest for intervention is estimated to be only USD$5.3bn. Although the RBNZ is suspected of having intervened three times last month, the only time that they officially confirmed intervention was on June 11th.

It is not a coincidence that the central bank chose to intervene when Australian markets were closed for the Queen's Birthday. If they intervened on a holiday once, they can do it twice. Central bank Governor Alan Bollard must be extremely frustrated that their intervention has done nothing to stem the New Zealand dollar's rise.

In fact, the New Zealand dollar rose to a fresh 25 year high against the US dollar this morning before ending the day slightly lower. For more on whether intervention is effective, see our Special Report.

Tonight, we also have the Reserve Bank of Australia rate decision followed by the Australian trade balance. The announcement should be a non-event because the RBA is not expected to raise interest rates and when they do not, no statement is released.

The recent strength of the Australian dollar is expected to push the trade balance lower in May. A weak number would follow today's sharp disappointment in retail sales.

Strong Euro Could Delay ECB Rate Hike

The rebound in the US dollar has led to a retracement in the Euro but this does not mean that the EUR/USD's shot at a new record high is over.

US traders will be missing out on two key economic releases due out from the Eurozone tomorrow morning.