May 20th 2009, Risk Appetite Debate Remains Strong

The USD continued to lose ground to the major currencies on Tuesday, but this was not the entire story. The greenback started the day off with steep losses against the EUR and GBP and appeared to be at risk of capitulating against them. However, upon the release of the U.S. housing sector data which produced unexpectedly negative figures, the USD actually fought back from its losses and settled within its range. Why would it do such a thing? Because those who have shown a high degree of risk appetite within the equities markets may have been taken aback by numbers that showed once again the sun may not be ready to shine within the U.S. economy. Building Permits figures turned in a number of 0.49 million compared to the forecast of 0.53 million and the previous result of 0.51 million. This was a disappointing number in many ways and the Housing Starts figures did nothing to make anyone happier coming in with an outcome of 0.46 million, below the estimate of 0.52 million.
The U.S. will release its FOMC Meeting Minutes today and while it is a certainty that no change will be made pertaining to the interest rate, what investors will be looking for rhetoric about quantitative easing. The currency markets are being affected by the prevailing sentiment which has been directly expressed by the positive results in the international equities markets. Wall Street declined yesterday when the poor housing sector numbers were published but did not show protracted weakness. Tomorrow weekly Unemployment Claims will be on cue and the Philly Fed Manufacturing Index is on schedule too. Both of these reports will be watched closely by traders who are trying to take advantage of market gyrations and investors who are still on the fence. The USD is again within the weaker realm of its range against the EUR and GBP. The greenback will continue to see its trend tested as the prospects of future growth are argued.

The EUR gained in value against the USD on Tuesday as the German ZEW Economic Sentiment report produced a good reading of 31.0, exceeding the forecast of 13.0 by a substantial amount. The broad European ZEW also brought positive data coming in with a figure of 28.5 compared to the estimate of 15.0. While these publications were no doubt good and reflect the viewpoints of others that the economic conditions are beginning to stabilize it should be pointed out for contrast that the Italian Trade Balance statistics were quite disappointing. Europe will be going into a long holiday weekend for the most part tomorrow. The Germans are scheduled to release their PPI data today and tomorrow will see a bunch of PMI Flash Manufacturing & Services reports. Inflation data from Germany today will not provide much of a punch and with most Europeans on holiday starting tomorrow we could see the EUR set to trade in a dollar centric fashion based on risk sentiment.
The Sterling continued to reach for new heights within its range against the USD and has shown that its trend may be nothing to stand in front of quite yet. The U.K. released its CPI and RPI data on Tuesday and they produced slightly negative numbers showing that inflation remains dormant at best. Today the CBI Industrial Order Expectations survey will be published and it is anticipated to have a reading of minus -50. Also the Bank of England will publish its MPC Meeting Minutes but little in the way of earth shattering news is expected. Tomorrow the U.K. will release its Retail Sales statistics and Friday will see Revised GDP numbers. With both of these reports standing in the shadows it is possible that we could see some volatility in the GBP in the coming days particularly with the Sterling perched at its highs against the USD and political instability in the U.K. palpable.

The JPY turned in a rather consolidated day of trading against the majors as international equity markets turned in rather mixed results. The economy of Japan continues to be roiled by bad data and the GDP release produced abysmal figures late last night. It is clear that the strong JPY is causing major problems for Japanese business and speculation about a possible intervention from the Bank of Japan is still a talking point among traders. Gold found itself around the 926.00 USD mark and continues to show that uncertainty prevails even though there has been a groundswell of people saying that the international economies are starting to stabilize. The JPY remains within a juncture that is interesting. It would be devastating for the Japanese to have the JPY get much stronger but because risk averse investors are abundant it seems to be caught in a web.
Written by: Robert Petrucci
Bforex Chief Commodity Expert and Forex Analyst