June 3rd 2009, The Confidence Game Continues

Weakness in the USD continued on Tuesday as the greenback found itself testing new lows against the EUR and GBP. The U.S. did release its Pending Home Sales data yesterday and it turned in an increase of 6.7% compared to a forecast only calling for a jump of 0.4%. It was the best result in the Pending Homes Sales report in seven years. Wall Street turned in lukewarm numbers yesterday only gaining slightly. The ADP Non Farm Employment Change figures are due today and are expected to produce a number of minus -525K, which would be worse than last month�s outcome of minus -491K. The ADP report will serve as the precursor for the all encompassing government Non Farm data this coming Friday. The ISM Non Manufacturing PMI survey is also on schedule today and has an estimate of 45.1. The USD continues to get hammered based on the perception that stability has not only returned to the U.S. economy but optimism that growth is a possibility by year end.
Yesterday�s housing news was taken in a good light, but skeptics point out that these numbers may level off because it is doubtful that mortgage rates will go lower. Thus the long term remains a source of constant debate as optimists point to stability and cautious investors warn that what is being played out is nothing more than a confidence game filled with rose colored glasses. The USD has now been drilled for over a month by the major currencies and talk about the need for a new international reserve currency is getting air time from a list of the usual suspects. However, most investors are sophisticated enough to realize that there remains little room or chance for another currency to emerge as a competitor to the USD short or long term as the economic and political maps stands. The rally in the international equities markets since the lows of March was the same launching date of the USD slump. Traders will keep their eyes peeled on the ADP report today and see if it brings about any surprises. The USD is set to be tested once again today and its negative trend will remain under the microscope.

The bandwagon grew on Tuesday for the EUR as it marched forward against the USD. The broad European Unemployment data was released yesterday and it turned in a result of 9.2%, which was worse than the forecast of 9.1%.Even upon less than flattering news the EUR continued its positive momentum and has set the table for ECB meeting tomorrow. Today the broad Final Services PMI data is on schedule and is expected to have a reading of 44.7, which would match last month�s result. Investors are clearly taking a wait and see approach to the central banks internationally but are not expecting much. The European Central Bank has been criticized for not being aggressive enough when dealing with the recession that has hit the continent. However in the face of this the EUR has not only maintained its value but gained. While this may help the stature of the EUR it is also clear that many European countries, particularly Germany, would frown if the EUR were to become too strong. This because exports from the European Union abroad would be severely hampered due the rising costs of goods for importers who would face stiff exchange rates. The EUR has had enjoyed the fruits of risk appetite returning to the investment sphere. While sunshine is always welcome, there could reach a point that the EUR no longer feels comfortable with too much.

The Sterling once again proved that its path remains solid by gaining against the USD. Data from the U.K. released on Tuesday showed improvements in Construction PMI, Consumer Confidence, and Mortgage Approvals. The Services PMI release is on schedule today and carries and estimate of 49.4, which would be better than the previous outcome of 48.7. Tomorrow�s Bank of England meeting results loom for investors but it highly unlikely that the BoE will be able to muster any massive surprises. With interest rates following a near zero rate policy and quantitative easing in place, it is only a matter of policy shifts now that could really stir the market. In political news it is no secret that Prime Minister Gordon Brown is under immense pressure due to the boiling scandal involving the expenses of ministers within his cabinet. However the political chaos that has now embroiled Brown�s cabinet has failed to put a dent in the performance of the GBP. Traders have found a stable base from which to ride if they have been Sterling bulls. While the heights of the GBP may come under question, there is no denying its results.

The JPY recovered some its ground on Tuesday as it firmly entrenched itself within a well practices range. International equity markets turned in mixed results yesterday without any real push. Gold remains at the very high end of its range as it moved above the 980.00 USD mark. Economic data from Japan continues to point to a recession and it is the economic outlook for Japan that remains the focal point of debate.
Written by: Robert Petrucci
Bforex Chief Commodity Expert and Forex Analyst