Dollar Mixed, Sterling Recovers

The US dollar is mixed. The dollar-bloc currencies remain firm, led by New Zealand dollar and prospects of more RBNZ tightening. The US dollar is threatening to fall through the CAD1.07 level and head toward the next target seen near CAD1.0650.

For its part, the Aussie is flat, just above $0.9400, but is resilient in the face of Moody's warning that house prices down under are vulnerable. The rating agency said, "The housing market appears to be increasingly likely to get caught up in a positive price feedback loop and eventually could face a correction." House prices rose at their fastest clip in four years in Q1. It did note that the overall economy may be less sensitive to the housing market because many households were advanced in their repayments, and the major banks were well capitalized.

The UK housing market is also a focus in the market. As anticipated, with the Financial Stability Report, the BOE has announced new curbs on mortgages. Several measures were announced. The key restrictions include 1) a new affordability test of a 350 bp increase in rates, rather than just 50 bp, and 2) a cap on loans for those who put 15% (permissible under the Help to Buy Program) of 4.5x household income. These news rules apply to banks that lend more than GBP100 mln to home buyers. Underwriting rules will be tightened.

These measures are generally mild, and the BOE's Carney has indicated the restrictions can be tightened further, if necessary. The measures announced should be seen a warning sign to home buyers and lenders. Sterling has completely retraced the losses seen response to the seeming soft-pedaling of the Mansion House hawkishness. It rose to a three-day high near $1.7035, shy of the week's high set on Monday just below $1.7050. Short-term UK interest rates which had begun the session softer, firmed on Carney's announcements, with the implied yield on short sterling interest rate futures rising 3-4 bp.

The market reaction suggests that the measures announce today were less severe than expected. Homebuilder shares rose, retracing some of their recent declines. Essentially, the BOE has two levers to manage the economy, interest rates (MPC) and macro-prudential measures (FPC). The mild use of the latter means, on the margin, more pressure on the former.

Yesterday was the first session since June 12 that the euro remained above the GBP0.8000 level for the entire session. Sterling's gains in response to Carney has seen the euro push back below that threshold. The first support is seen near the week's low GBP0.7980 and then GBP0.7960.

Yesterday was also the first session in nearly three weeks that the euro held above $1.36 for the entire session. Selling pressure against sterling may threaten this from being extended today. Additional support is seen in the $1.3570-80 area. That said, yesterday's US GDP shocker has kept US rates softer, and given the limited fallout thus far of negative ECB deposit rates and no TLTRO until September, some euro bears may be forced to re-consider.

The decline in US rates may also appear to be weighing on the greenback against the yen. Participants continue to monitor the 200-day moving average, which comes in near JPY101.70. The dollar has not spent any significant time below there since late 2012. Some observers see in Abe's latest "third arrow" efforts, measures that go against the efforts to lift inflation. The warming to foreign labor and further deregulation of the labor market (for earners over JPY100k) would seem to weaken efforts to boost wages. Deregulation and efforts to boost productivity may be desirable in their own right, work to lower inflation.

We note that China announced that it would remove the cap on foreign currency deposit rates for small corporate depositors (less than $3 mln) in Shanghai. Previously, the removal of the cap applied only to the Shanghai free-trade zone. This next step may include individuals in the exemption. As of the end of last month, foreign currency deposits accounted for about 3% of the CNY16.3 trillion overall deposits, according to reports.

The North American session features weekly US jobless claims and the May personal income and consumption reports. The jobless claims are overshadowed by next week's national report, where the early consensus is for another 200k non-farm payroll growth. Personal income and consumption are expected to have bounced back in after a soft April. While Q1 GDP as a major disappointment and economists will have to revise down the entire year's forecast (again), it was understood to be a bit of a fluke and not really representative of the economy.