USD: New home sales surge offer modest support ahead of Jackson Hole – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar is trading on a firmer footing in the Asian trading although the major FX rates remain very stable ahead of Fed Chair Yellen’s key note speech at Jackson Hole on Friday.

Key Quotes

“The US dollar derived modest support yesterday from the release of the much stronger than expected new homes sales report for July. The report revealed that new homes sales surged by 12.4% in July reaching their highest level since October 2007. Renewed upward momentum in the housing market would be encouraging developing which should help the US economy return to more solid growth after its weak performance since late last year. The Atlanta Fed’s GDP nowcast model is still estimating that economic growth is likely to rebound strongly in the current quarter which would help to offset the unexpected weakness in Q2 driven by the large drag from inventories.

A return to more solid growth would support the Fed’s plan to continue gradually normalizing monetary policy with a rate hike still likely this year absent a negative economic shock. It stands in contrasts with the market’s scepticism that the Fed will continue to tighten monetary policy in the coming years. The spreads between the implied yields on the Fed fund futures contracts between September 2016 and September 2017, and between September 2016 and September 2018 are currently only 0.23 percentage point and 0.35 percentage point respectively highlighting that the market doubts that the Fed will raise rates more than once in the coming years.

With the market already discounting such a dovish outlook for Fed policy it is hard to see what Fed Chair Yellen could say on Friday to prompt the market to further scale back Fed rate hike expectations. As a result even if Fed Chair Yellen fails to provide a clear signal that a rate hike is likely in September, the negative impact on the US dollar should prove limited. In contrast, if she provides a clear signal that the Fed is likely to resume rate hikes in September it would result in a larger market adjustment offering more support for the US dollar. On balance, we still believe that Chair Yellen is unlikely to provide a strong signal for a September hike but will leave it open as a policy option dependent on incoming economic data.”