Stock Market Correction Could Support USD

* The dollar rose on Friday as US stocks consolidated recent strong gains and risk appetite moderated. US existing home sales rose to the highest level in more than two years. The S&P 500 index declined 13.31 to 1,079.69 despite strong earnings from Microsoft and Amazon. The yen fell to the lowest level in a month. The euro closed below the 1.50 handle but gained for a fourth consecutive week. Sterling plunged and closed modestly lower for the week after UK Q3 GDP unexpectedly declined for a record sixth time. The Australian dollar fell for a second day as commodity prices eased. Despite today’s decline, the aussie gained for a fourth straight week to the highest level since August 2008. The Canadian dollar fell today and for the week as the Bank of Canada warned about the high value of the loonie. The EUR/JPY, rising for a 12th consecutive day, is making a possible tipple top.

* The dollar index rose from a 14-month low on Friday. The index, inversely correlated with the US stock market, has been falling since the stock market made a bottom in March. Exceptionally low US interest rates are weighting on the greenback as investors fund risky assets in low interest dollar loans. At the beginning of the financial crisis, the dollar appreciated and stock prices fell. It is difficult to determine whether the dollar’s appreciation overvalued assets or falling asset prices appreciated the dollar as investors repatriated funds to safe US papers. However, the correlation is clear and consolidation in the overbought stock market may mean an appreciation of the dollar.

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Financial and Economic News and Comments

US & Canada

* US existing home sales jumped a more-than-expected 9.4% m/m in September to a 5.57 million annualized rate, the highest in more than two years, from a 5.09 million annualized pace in August, figures from the National Association of Realtors showed. Existing home sales rose 9.2% y/y. Existing home sales gained in every major region of the country. Sales advanced for both single-family units and condos/co-ops. The median price of an existing home declined to $174,900 in September and fell 8.5% y/y, still a big improvement compared to January’s 17.5% y/y price drop. The months’ supply of existing homes at the current sales rate declined to 7.8 in September from 9.3 in August.

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Europe

* The eurozone manufacturing PMI rose more than expected to 50.7 in October from 49.3 in September, indicating the eurozone manufacturing sector expanded for the first time since May 2008, according to advance October PMI data from Markit Eonomics. The services PMI advanced more than estimated to 52.3 from 50.9, showing the eurozone services sector expanded at a faster rate in October. The composite PMI climbed more than expected to 53.0 in October, the highest since December 2007, from 51.1 in September.

* The German manufacturing PMI grew to 51.1 in October from 49.6 in September, advance October PMI data from Markit Economics showed, indicating Germany’s manufacturing sector expanded for the first time since July 2008. The services PMI declined to 50.9 from September’s 52.1, indicating Germany’s services sector continued to expand albeit at the slowest rate in three months.

* Eurozone industrial new orders increased a more-than-expected 2.0% m/m in August, a fourth consecutive month-on-month gain, after an upwardly revised 3.0% m/m advance in July, according to data released by Eurostat. August industrial new orders fell 23.1% y/y, following July’s revised 24.9% y/y drop.

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* The Ifo German business climate index increased to 91.9 in October, in line with expectations, from 91.3 in September, indicating Germany’s business confidence climbed for a seventh consecutive month and to the highest level since September 2008, data from the Ifo Institute showed. The current conditions index increased to 87.3 in October from 87.1 in September, while the business expectations index rose to 96.8, the highest level since May 2008, from 95.7.

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* UK GDP unexpectedly declined 0.4% q/q in Q3 2009 after falling 0.6% q/q in Q2, according to advance Q3 GDP data from the Office for National Statistics. The economy has now contracted over six quarters, the longest since records started in 1955. Q3 GDP fell 5.2% y/y, following Q2’s 5.5% y/y contraction.

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Asia-Pacific

* Australia’s import prices fell a more-than-expected 3.0% q/q in Q3 2009 after a 6.4% q/q decrease in Q2, while export prices decreased a more-than-expected 9.6% q/q after Q2’s 20.6% q/q drop, figures from the Australian Bureau of Statistics showed. Import prices declined 2.3% y/y in Q3; export prices tumbled 20.7% y/y, the biggest annual drop since the current series began in Q3 1974.

Source: Hans Nilsson

23.10.2009