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Markets

Euro Off Yearly Highs as Risk FX Hurt By Japan Downgrade

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Top Stories

  • Japan rating cut to AA- form AA
  • German CPI muted remains below 2%
  • Nikkei up .74% Europe of -0.27%
  • Oil drifts to $86.50/bbl
  • Gold up to $1340/oz.

Overnight Eco

  • AUD M1 Leading Index 0.0% vs. 0.3%
  • JPY Trade Balance 0.71T vs. 0.53T
  • EUR German CPI1.8% vs.2%
  • EUR French Consumer Sentiment 85 vs. 86
  • GBP CBI Realized Sales n/a

Event Risk on Tap

  • USD Weekly Jobless Claims 407K
  • USD Core Durable Goods 0.9%
  • USD Pending Home Sales 0.9%

Price Action

  • USD/JPY rocked by S&P cut but off the highs at 83.20
  • AUD/USD holds above .9900
  • GBP/USD holds up best amongst risk above 1.5900
  • EUR/USD massive profit taking post 1.3730 yearly high but consolidates above 1.3650

Currency markets were roiled today by S&P's unexpected downgrade of Japan to AA- from AA status with the agency stating, "The downgrade reflects our appraisal that Japan's government debt ratios -- already among the highest for rated sovereigns -- will continue to rise further than we envisaged before the global economic recession hit the country." The news sent USD/JPY through the 83.00 figure as it verticalized by more than 100 points in a matter of minutes before setting down to trade around 82.80 by mid-morning European trade

As we noted earlier, "Although Japan is able to finance nearly 95% of its debt needs internally, the changing demographics of the society are creating unsustainable pressures on government finances. As Japan ages its pool of savers has been declining while its welfare obligations continue to rise at an exponential rate. The imbalances in the Japanese system have been known to analysts for a long time, but today's action by the S&P reflects the growing realization that the Japan's credit worthiness may be threatened if the current spending patterns persist unchecked."

Today's S&P downgrade may be the start of a broader market shift in attitude towards the yen. Up to now the single currency has traded primarily as a risk aversion instrument and has held its value against the greenback due to narrowing yield spread differentials. However, the yen remains vulnerable to further selloffs as it may now begin to trade off credit risk concerns. The pair is still hemmed in by very strong resistance at the 84.00 level, but if it is able to break above that figure with conviction the rally in USD/JPY could extend to 88.00 by the end of Q1.

In other economic news German CPI was a bit more muted than expected with 3 out of the 6 states printing below expectations. The news suggests that despite massive increases in input costs price pressures at the retail level remain contained and should ease ECB concerns for the time being. The EUR/USD was hit particularly hard by the S&P downgrade as the pair reversed quickly after setting a fresh yearly high at 1.3730. The viciousness of the selloff in euro was likely the combination of profit taking and the S&P downgrade hitting at the same time. It has since stabilized at the 1.3650 level attracting bargain hunters and may stage a second run at yearly highs as the day progresses if risk appetite improves.

In North America today the eco calendar contains weekly jobless claims and Durable goods orders with markets anticipating steadiness on the labor front and mild improvement on Durables. US economic data has generally been positive since the start of the year indicating that the economic recovery is gathering momentum. So far that has not translated into higher yields, but if the economic news continues to improve the benchmark 10 year bond should rise above 3.5% which will likely provide further support for the USD/JPY rally.

FX Upcoming

Currency GMT EST Release Expected Prior
USD 13:30 8:30 Weekly Jobless Claims 407K 404K
USD 13:30 8:30 Core Durable Goods 0.9% 3.6%
USD 15:00 10:00 Pending Home Sales 0.9% 3.5%

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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