Analysis <October> <24>:<USD & Pandora’s Box >

USD

The safe haven banner was raised once again by the USD as it gained across the board –
except against the JPY - in a repeat performance from the past several sessions. Even as
Unemployment Claims weekly data showed a negative number of 478K, which was above the
470K estimate the USD continued its steady positive roll. Today Existing Home Sales figures
will be released and they are forecasted to show a 4.93 million number. Investors however
have clearly turned their attention to the many statements coming from government officials
who seem to be proposing new packages and explanations concerning the financial crisis
daily. Yesterday FDIC Chairperson Sheila Blair continued to mull publically a plan which
would guarantee home owner mortgages - protecting them from foreclosures. This plan is
sure to be met with an extreme amount of criticism by many but nonetheless shows how
widely Pandora’s box has opened in the U.S. and the length’s to which the government is
considering stepping into the fray.

The U.S. economy is certainly facing a slowdown if not an outright recession. Yet investors
have shown an amazing hunger for the USD in the face of so many questions pervading the
marketplaces. Emerging markets such as Brazil, India, Hungary and others have shown an
extreme amount of volatility within their currencies as global investors have sought to take
their money out of investments in these countries. Actions such as this have propelled global
investors to seek calm waters as they have moved in exodus from perceived riskier markets.
Not even the often revered Alan Greenspan could save the day yesterday as he was called to
testify in front of Congress regarding the current crisis. Greenspan, the ex-Federal Reserve
Chairman prior to Ben Bernanke, took a grilling from House of Representative member and
was forced to admit that regulations that he helped create had obviously failed. The USD goes
into Friday’s trading session having gained significantly on the EUR and the GDP. Traders
that have the ability to be active in such volatile markets will certainly find plenty of
opportunities once again today.
EUR

The EUR fought bravely against the USD for most of Thursday but as the trading session
grew late it started to lose ground once again. Continuing its slide, the EUR is coming under
weight largely from investor sentiment that its interest rate will have to be cut. The European
Union will release a large amount of PMI data today from Germany, France, and the broad
community of nations. The German Flash Manufacturing PMI reading is expected to be 46.0
today. The French Flash Manufacturing PMI is forecasted to show a number of 42.3 and the
broad European figure is projected to have a result of 44.0. Disturbing news continues to
come out of the European Union from a variety of its member states outlining the lack of
cohesiveness and problems facing it in the wake of the financial crisis. An example of this is
that Sweden, which continues to use its own currency – the Krona – cut their interest rates by
50 basis points yesterday. The move by Sweden’s Riksbank is considered a major turn of
direction after admitting that they are now concerned by the stress their banks and economic
sphere is showing. The EUR is likely to continue to face a strong test today.

GBP

The Sterling was punished in trading yesterday, losing significant ground to the USD on
Thursday. Importantly today the U.K. will release its Preliminary GDP and it is forecasted to
show a minus -0.2% number, this would be in essence an official confirmation that the U.K. is
in a recession. Bank of England Governor Mervyn King earlier in the week said that he
believed the U.K. faced a looming recession and that it could be prolonged. Today could
essentially be the day that the U.K. confirms their recessionary fears and those of global
investors whose sentiment has been massively affected by a lack of confidence and the
opinion that the world marketplace is bound to follow suit. The Sterling has been on a long
downward slope and has provided traders with extraordinary movement. A reversal of fortune
for the GBP may not be in store today.
JPY

The JPY has been the strongest of all currencies since the financial crisis has broken out
and yesterday was no exception. The JPY gained across the board as it provided investors a
safe haven for the risk adverse. Global equity market weakness including Japan’s own
Nikkei, coupled with the many questions surrounding the major central banks have left
investors with a very clear lack of risk appetite.

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