Euro Sells Off on Rumor That France May Be Downgraded

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Top Stories

  • Risk FX rallies on short covering post LTRO reversal
  • UK CA deficit largest on record
  • Nikkei off -0.77% Europe up 1.14%
  • Oil at $99/bbl
  • Gold at $1615/oz.

Overnight Eco

  • NZD GDP QoQ (3Q) 0.8% vs, 0.6%
  • GBP GDP (QoQ) (3Q F) 0.6% vs. 0.5%
  • GBP Current Account ( BP ) (3Q) -15.2B vs. -5.6B

Event Risk on Tap

  • USD Chicago Fed Nat Activity Index ( NOV )
  • USD GDP QoQ (Annualized) (3Q) expected at 2%
  • USD Initial Jobless Claims (DEC 16)
  • USD Continuing Claims (DEC 9)
  • USD Leading Indicators ( NOV ) expected at 0.4%

Price Action

  • USD/JPY holds above 78.00
  • AUD/USD capped at 1.0140 for now
  • GBP/USD 1.5700 caps after weak CA
  • EUR/USD 1.3100 caps the risk rebound

Risk currencies staged a small rebound in late Asian and early European trade but gave up most of their gain by mid-morning dealing as traders continued to digest the implications of yesterday's massive near 500B EUR take up of the LTRO from the ECB. The EUR/USD rallied to rise above 1.3100 on demand from Middle East buyers but stalled at those levels and quickly reversed the move to trade at 1.3065 on a unconfirmed speculation that France may be downgraded.

Overall the price action remained choppy in thin pre-holiday trade as markets remain concerned about the fragility of the EZ financial system. Yesterday's uptake was initially viewed with enthusiasm as markets assumed that banks would recycle the capital to purchase sovereign debt, but as fears spread that borrowing from the tender would be used primarily to shore up the banks own balance sheets in order to prepare for the higher capital requirements mandated by new Basel rules, the euro sold off in yesterday's North American trade.

Today's price action is further indication of the skittishness of the market. The rumors on the downgrade of France have circulated the market for many weeks, but what is most damaging to the EUR/USD is not the rumor but the fact that the market finds it to be credible. It speaks volumes to the precarious state of French finances and suggests that core Europe itself may come under the assault of bond vigilantes if EZ policymakers are unable to pacify the markets.

On the economic front the calendar remains quiet with only UK GDP and Current account data on the docket. UK 3Q GDP printed slightly better than forecast at 0.6% vs. 0.5% eyed boosted by spending in services and construction. Going forward however the market expect growth in Q4 to slow materially to 0.0%. More troubling still was the massive gap in the Current Account deficit which widened to more than 15B GBP - the worst on the record. So far UK has been able to escape the scrutiny of the bond markets, but next year it may face the same sort of problems as the EZ if its finances do not improve.

In North America today the calendar is also lackluster with only the LEI data on tap. With market headed into pre-holiday trade, the price action may be subdued, but risk FX remains vulnerable to further selloff and if equities turn negative EUR/USD could test 1.3000 as the day progresses.

FX Upcoming

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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