US: demand for housing keeps increasing
By Yann Quelenn
The US real estate market continues to enjoy robust grow. One key indicator of the US economy, existing homes sales, keep increasing and are now at 2007 levels. Today, June data comes in and is seen continuing around May’s record levels. The million-dollar question is now whether the US real estate market is in a bubble, and if so, when will it burst? Like the US stock markets, the real estate market has been largely underpinned by free money provided by the Fed over the last decade.
On top of that, housing prices are above their 2007 levels. There is no evidence at the moment that we reached an inflection point and prices may rise further. Yet, we already heard concern about asset valuation from the Fed regarding stocks. Nonetheless, the “surprising” recent dovish comment from Janet Yellen paves the way for more patience. In particular, the US debt level is way too high and inflation way too low to increase rates. But markets do not seem to worry about those levels.
We remain bullish on the EUR/USD at least until September. Markets estimate that the ECB will hint at further tightening and will follow the Fed path. In our view, there is some room for more EUR/USD increase.
JPY’s rally still has legs
By Arnaud Masset
The Japanese yen has been rallying strongly over the last two weeks as investors continued to discount the Fed’s hawkish stance. USD/JPY slipped through the 111 support point (a psychological level and Fibonacci 61.8% on June-July rally). The road is now wide open for further decline with the 109 threshold as first target.
The Federal Reserve will wrap up its July meeting on Wednesday with only an updated statement. We will have to wait the September meeting to get new economic forecast and a press conference. Therefore, it will likely be a non-event as Janet Yellen will surely seize the opportunity to play for time, rather than rushing to tighten monetary policy. Yet, the clock is ticking and postponing the timeframe further would send a negative signal to investors. The September meeting will therefore be the next key event.
In anticipation of this meeting, the market will closely monitor economic data from the US. A reversal in the negative trend of the last few months will quickly trigger into a re-pricing of a solid tightening pace, which would translate into higher yields and a stronger dollar. In the meantime, even though we think that the dollar’s debasement has reached its limit against several of its peers, the Japanese yen still has room to appreciate, thanks to its safe-haven status.