Dollar Risks - Are Consumers Really Happy? (page 1 of 2)

US Dollar
With no US economic data released today, the dollar has started the new week on a softer footing. Recovery was the main theme as the greenback climbed higher against all of the majors. This week, we have a rather light economic calendar with only second tier data due for release. Most of the reports are expected to validate Bernanke's hint at a pause last week, starting with tomorrow's consumer confidence and existing home sales reports. Analysts are only forecasting a small dip in confidence from 105.7 to 104.5 in July, but based upon the most recent non-farm payrolls release, tensions in the Middle East and rising prices at the pump, the risks are tilted toward a bigger drop in confidence. Unhappy consumers suggest that uncertainty and higher costs could pinch the pocketbooks of consumers, which may lead to another month of weakness in retail sales. Meanwhile with the US economy hinging upon the stability of the housing market, existing home sales will be equally important. Unlike builders, homeowners are more reluctant to offer discounts and upgrades to spur sales. As a potential sign of how the report may come out is a recent a survey by the Wall Street Journal that indicated an increase in inventories on the market and a decrease in house prices across the nation. Orlando has been the biggest hit with a 397 percent increase in housing inventory compared to a year ago. Tampa and Miami both saw a 100 percent increase in inventory while sales in California have been slumping every month. It is slowly becoming a buyers market where time is on the purchaser's side and we expect to see that reflected in the housing market report. Even if both consumer confidence and existing homes sales surprise to the upside, it does not change the fact that the outlook for the US economy is still uncertain. With $400 billion worth of adjustable rate mortgages (ARM) or 5 percent of total mortgages readjusting to market rates for the first time this year, homeowners could see their monthly mortgage payments increase by an average of 25 percent. In addition, another $1 Trillion worth of ARM are scheduled to reset next year. Unless we see both releases double expectations, their positive impact on the market's rate hike expectations should be limited. Meanwhile, the Canadian dollar was actually a bigger focus today as retail sales took a surprise move into the red. Originally expected to rise by a modest 0.1 percent after solid gains for the past two months, sales actually fell 0.6 percent in May. After Governor Dodge warned of tough times at the last monetary policy meeting, economic data has been getting progressively worse.

Euro
Despite strong economic reports, a recovery in the US dollar has sent the Euro lower. Industrial production in the Eurozone rose 2.3 percent in the month of May, which was far stronger than the market's forecast for a 0.2 percent drop. Looking ahead, today's Belgian manufacturing survey could shed more light on the possible outcome of Wednesday's German IFO report. Even though the Belgian survey is a tiny index, it tends to be a strong leading indicator of economic activity in the region as a whole. The index dipped from 10.6 in June to 5.6 in July, which is still consistent with growth. Taken in combination with the much weaker German ZEW survey released last week, the IFO survey is poised for a dip after hitting a 15 year high in the month of June. Even if it does slip from 106.8 to 105, it is still an extremely strong reading that is indicative of solid economic conditions.