Currencies and equities are trading slightly higher this morning thanks to better than expected economic data from Europe and a relatively healthy Spanish bond auction. The EUR/USD is taking its cue from Spanish bond yields and the steep decline back below 6 percent encouraged investors to dip their toes back into euros. For the time being the 1.30 level continues to hold in the EUR/USD and even though we believe this level will be taken out eventually, a further rise in Spanish bond yields would be needed for that to happen. Mixed U.S. housing market numbers failed to have a lasting impact on the dollar. Housing starts fell for the second month in a row by 5.8 percent. This was the steepest slide in nearly a year and drove starts to a 5 month low. Building permits on the other hand continued to rise by 4.5 percent. Unlike starts, permits have gradually increased for the past 3 months and are now at its highest level since September 2008. The discrepancy between starts and permits is good news because it represents a tremendous amount of backlog and once the recovery gains momentum, housing starts will rise quickly because permits have already been attained by builders.
Meanwhile up North, the Bank of Canada is gearing up for a rate hike. According to the BoC, "removing stimulus may become appropriate." Unlike other parts of the world crippled by high debt levels and slowing growth, Canada has benefitted significantly from the improvement in the U.S. economy and the rise in oil prices. Business and consumer confidence in Canada improved to the point where the BoC felt comfortable enough to raise its 2012 growth forecast to 2.4 from 2 percent and its 2013 forecast from 2.4 to 2.8 percent. Most of Canadian growth is expected to come from domestic demand. Last month, Canada experienced its strongest pace of job growth since 2008 and this improvement in the labor market will translate into stronger consumption. In terms of external factors, the BoC is looking at it from a glass half full point of view - they expect Europe to rise from recession in the second half of the year and they view the U.S. economy has slightly stronger. If not for Europe's troubles, the BoC would have probably raised interest rates today. However don't interpret the BoC comments to mean that a rapid series of consecutive rate hikes will follow. The central bank will raise interest rates gradually to avoid over tightening in what can still be characterized as uncertain global economic conditions. The hawkish comments from the Bank of Canada drove USD/CAD to 0.99 and it should only be a matter of time before USD/CAD slips to a fresh 7 month low.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.
