The US housing sector may have bottomed out, but the big question is: will it rise? Support for the US dollar from this sector will take time, say John Kicklighter of DailyFX.
In the interview below, Kicklighter also discusses the achievements and hurdles of the EU Summit, the impact of the London Olympics and more.
John Kicklighter is a currency strategist for FXCM in New York where he specializes in combining fundamental and technical analysis with money management. John authors a number of regular articles for DailyFX.com, ranging in topics from basic fundamental forecasts for the G10 economies and commodities to more complex subjects like the level of risk sentiment across the financial markets and the carry trade specifically. John has actively traded since he was a teenager. His experience ranges from spot currency, financial futures, commodities, stocks, and options on all of these instruments for his personal accounts. John graduated from the Zicklin School of Business at Baruch College in New York with a Bachelors degree in Finance and Investment.
- Do you think that the decisions made at the EU Summit were a “game changer” for the euro crisis? Or is the recent rally just a correction before another big fall?
The general scope of what was suggested in the EU Summit looks the part of a serious change in the financial crisis fight in the Euro Zone – but then so did the many iterations of the ongoing rescue effort before it. In terms of scope, perhaps the most sweeping development was the agreement of a common bank supervisor, which for most intents and purposes is the foundation to a banking union and possibly stepping stone for fiscal union. That leads to greater integration and lower boundaries to enacting rescues in the future. But that is the future and the statement itself said this step would come sometime before the ‘end of the year’. The concern is immediate as global financial markets and the collective economy is cooling now. To answer that threat, Italy’s Monti and France’s Hollande pushed through stability-minded commitments: granting the ESM the ability to recapitalize banks directly and purchase sovereign bonds. That said, the former requires the banking supervisor (sometime before year end?) and there are little details on how the ESM can offer support to governments (it seems there are still conditions that need to be met and this carries the burden of approval – not easy with Germany).
- There are quite a few positive signs from the US housing sector. Has the sector bottomed out? How important is this sector for the dollar?
The housing sector reflects one of the largest components of US GDP and it is by far the largest source of wealth for the average American. The sector’s recovery is critical for a lasting recovery. As for whether the sector has bottomed out, I think we need to rephrase the argument to whether it is ready to show significant growth. If we looking at price and sales statistics, it looks like housing found an equilibrium a while ago; but there has been a critical lack of upward progress on both fronts. Changes to regulation, extremely low lending rates and a slow build in employment support US housing. That said, higher requirements and lower availability for funds for loans are creating problems of their own. A recovery in the housing market will take a long time, but it will help the underlying fundamental picture of the greenback. That said, there will be a transition period where its support for growth will undermine the dollar’s safe haven status.
- Worries are growing around China, as official and unofficial PMIs diverge, the housing sector is struggling and Chinese demand from Europe is slowing. Will this impact China’s currency positions?
A strong dowturn in the global economy means weakening consumption of Chinese exports. That is further exacerbated by the steps the country has taken to put itself more on an even footing with its global counterparts. Officials recognize that as global economic activity slows and financial conditions become strained that they will need to do more to stabilize the economy. That means a slower shift towards floating exchange rates and open trade practices. If they moved too quickly in this environment, it could create tremendous volatility and potentially swamp their economy.
- The Canadian dollar seemed resilient to the drop in oil prices. How low does oil need to fall to in order to see a bigger impact on the loonie?
The correlation between USDCAD (rolling 20-day) has tempered somewhat recently – now -0.55. That said, the six-month comparison is still exceptional at -0.88. For USDCAD, the trade of energy between the two countries is a critical economic link. That said, there are other fundamental considerations that can take precedence here (risk appetite trends being a big one). It is worth noting that the correlation between oil prices and carry trade in general is pretty strong – both running on risk appetite trends. It is better to look at this performance as correlation rather than causation. If risk aversion intensifies, it will most likely reflect weakened growth prospects and thereby lead to lower energy demands.
- The London 2012 Olympic games begin at the end of the month. Will that have an impact on the pound?
From an economic perspective, there is a short-term boost to the economy that hosts the Olympics in construction and tourism-based growth. There are many instances from the past that have shown, however, that there is a ‘comedown’ period after the events have passed. For the sterling, few innate fundamental considerations have offered it strength or weakness. Fears that the spreading Euro Zone crisis will infect the UK and/or stimulus will continue to inflate, thereby devaluing the currency are amongst the few active drivers. The Olympics impact will likely be modest and seen only with those pairs that cancel out most other fundamental considerations (few and far between).