USD: Housing Pop Could Prop Up US$. Is the US housing market poised to break out of its recent slump? Evidence from the Federal Reserve’s latest survey of lenders certainly suggests so. Not only are banks apparently loosening lending conditions to a greater extent, but they also expect a signifi cant upturn in demand. Of course expectations and reality can differ, and the MBA’s loan data continue to hug cyclical lows. However, the lenders’ survey was accurate in predicting last year’s downturn, and as such housing demand could well pick up in the coming months. If so, it will add a vital missing cog to the wheel of US growth, reduce concerns among the FOMC regarding hiking rates, and support the US$.
GBP: BoE Rates Expectation Still Ahead of Reality? Governor Carney continued to play yo-yo with UK interest rate expectations and sterling in this week’s Infl ation Report, again appearing dovish by citing weak pay growth as a reason for keeping rates in hold. Yet interest rate expectations for the Bank of England are still running well ahead of those for the Federal Reserve. But if wage growth were the key measure for Yellen and Carney alike, the Fed would appear a lot closer to a rate hike than the BoE. Any further pushing out of rate hike expectations in the UK, or bringing forward in the US, could see cable fall below 1.65.
JPY: Beware Yen Expectations Moving Too Far. A far as yen forecasts go, 110 is the new 115, and 105 is the new 110. Consensus forecasts for further yen depreciation have been scaled back, with the BoJ apparently waiting for progress on structural reform before aiding an ailing economy with further stimulus. But this week’s slump in GDP, and in particular the larger than expected decline in consumer spending, suggests that the economy is ailing even more than they had expected. We were never as bearish as the consensus on the yen, but we certainly wouldn’t be buyers of the yen at current levels if weak economic data raises once again expectations for even more dramatic BoJ action.
CIBC