Record Decline in Existing Home Sales Spooks USD/JPY

U.S. equities are trading higher this morning, which helped lift higher yielding currencies and force the U.S. dollar to give up some of its recent gains. Existing home sales was the only piece of meaningful U.S. economic data released today and despite the record decline in home sales, the initial impact on the dollar was nominal. After last week's blood bath, a relief rally has swept across the financial markets.

In December, 5.45 million units of previously owned homes were sold, down 16.7 percent from the previous month. On a percentage basis, this decline was the largest ever reported by the National Association of Retailers. A deeper look into the report reveals weakness across the nation as demand plunged ahead of the original Nov 30 expiration of government tax credits - the credits have now been extended to contracts signed by the end of April. The number of months that the homes have remained on market also increased, raising fear that the housing market has turned.

However we believe that it is premature to turn overly pessimistic on the real estate sector simply because of one month worth of data. The deadline and scope of the housing tax credits have been extended, providing continued support for the sector. The existing home sales report also indicated that the medium price of a home sold increased 1.5 percent, the first rise since Aug 2007 and the biggest increase since May. This suggests that homeowners may have grown a bit more optimistic about the outlook for the U.S. economy. Nonetheless, the possibility that this was only a temporary decline has not stopped the dollar from falling against the Japanese Yen and we expect to see further losses.

Looking ahead, this week's FOMC meeting, the results of Greece's bond auctions and the vote to confirm Bernanke for a second term will dominate trading.

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