Analysis <October> <17>:<Bad News And Inconsistent Results >

USD

The USD had an inconsistent day of trading on Thursday following the lead of the global
equity markets which continue to suffer from volatile sentiment. By the end of the day the
USD lost ground to the GBP and EUR but this was not without a fight and a broad trading
range. Economic releases, the foundation of many investor’s whims, have taken a backseat to
the ongoing sentiment being generated daily by the financial crisis. Concerns about liquidity
and their affect on credit lines for trading have placed a great amount of strain on investors as
they find themselves confronting fast changing equity and commodity markets. The first two
economic releases published yesterday in the U.S. provided fair results as the Core CPI came
in with a 0.1% result, barely missing the 0.2% expectation. Weekly Unemployment Claims
produced a 461K number, which was better than the projected 469K. However, the next two
key reports were negative, the TIC Net Long Term Transaction figures had a drop to 14.0
billion from the previous figure of 28.0 billion. The most disappointing news was from the
Philly Fed Manufacturing Index which had a startling drop to minus -37.5, miles below the
expected reading of -9.0.

Today in what typically would be considered huge data, Building Permits figures will be
released and are forecasted to be .84 million compared to the previous number of .86 million.
This will be followed by the University of Michigan Preliminary Consumer Sentiment
numbers which are estimated to be 66.0 after a reading of 70.3 before. Given that the Empire
State Manufacturing Index and the Philly Fed’s Manufacturing reports have provided such
negative data the past two days, investors will watch the results of the Consumer Sentiment
numbers closely. Whether traders use these numbers is another matter, as the market is still
reacting to ‘outside risk events’ coming from government pronouncements. Speculation is rife
regarding all the major central banks and their monetary policies. The U.S. does appear on the
cusp of a recession per most economic data, certainly the pressures inflicted from the
developing financial crisis will not help the situation. The Federal Reserve’s next interest rate
meeting is scheduled for the last week of October and there is a large debate among
economists and investors as to what the Fed’s next move should be. The USD will find itself
tested today in what may be a consolidated range.
EUR

The EUR picked up some ground against the USD in rather unspectacular fashion on
Thursday. The EUR seems to be settling into an uncomfortable range against the USD as the
financial crisis is digested by more investors and as they watch various governments and
officials step up to the microphone and offer their opinions on how best to deal with the
meltdown. Yesterday the Italian’s released their trade balance figures and they had a minus
-2.12 billion result, which was below the expected minus -1.20 billion. Today the Europeans
will release their broad Trade Balance data, the number is expected to be minus -5.4 billion,
lower than the previous result of minus – 6.4 billion. The trade balance numbers today will
not have a spectacular affect on trading unless they miss their estimate by a very large margin.
Investors will be paying more attention to the ongoing meetings and statements concerning
the financial crisis. The ECB will also continue to be monitored regarding any opinions it
offers. While the EUR may trade in a dollar centric fashion, it is more apt to say that investors
will be affected by the ongoing developments that abound.

GBP

The GBP found firmer ground on Thursday against the USD on a day that the U.K. produced
no major economic releases, today will also be void of data. The U.K. government is under a
profound amount of pressure from its constituents to act as consumers face the perils of a
recession. Because of this, elected officials have been vocal about their beliefs concerning
what actions the Bank of England should be undertaking with their monetary policy. The
interest rate of the U.K. remains the highest of the major central banks at 4.50% and many
investors believe that the BoE should act sooner rather than later to provide economic relief.
If and when that is going to happen - is providing much of the trading impetus for the Sterling
presently. Expect the GBP to continue to trade under pressure as traders have their sentiment
tested.
JPY

The JPY lost ground to the USD on Thursday as global equity markets regained their
composure and rebounded. Risk appetite which has been dormant to a large degree made
an appearance. This was highlighted perhaps by the continuing weakness in the price of
gold which dropped dramatically once again on Thursday. Equity markets will continue to
provide clues to the direction of the JPY.

Written by: Robert Petrucci, Chief Commodity Expert and Forex Analyst