A Deluge of Downgrades!

While there was little to cheer about UK retail sales data released yesterday, the situation in Europe was relatively calm, following successful Spanish bond auctions and better-than-expected manufacturing activity across the Eurozone. However, as we come to the end of this week, the fear of a possible mass ratings downgrade of Eurozone economies still looms large with six of the world’s largest banks having already downgraded by Fitch. We expect the session to be relatively quiet, with a positive bias towards the high yield currencies.

Pound Sterling – UK Markets

The impending threat of possible credit ratings downgrades in the Eurozone has led the Pound to hold its turf against the Euro. Sterling has advanced against the US Dollar this morning as traders increased their bets on riskier assets following the slew of positive US economic reports released yesterday. A higher-than-expected decline in British retail sales for November, released yesterday, failed to deter the rally in Sterling against the majors, as markets seemed to be optimistic that a late pickup in Christmas shopping would ease pressure on retailers. ECB member, Christian Noyer’s opinion that Britain was more deserving of losing its top-notch credit rating than France was largely ignored by market participants. Meanwhile, the possibility of further stimulus received a boost, after the BoE and GfK NOP indicated that inflation expectations for the year ahead had eased to 4.1% in November. With no major economic releases scheduled for today, we expect Sterling to move higher against the majors.

US Dollar – US Markets

The US Dollar is weaker against Sterling and the Euro this morning, as risk appetite among traders improved following strong economic reports yesterday. Markets have shrugged off fears about the Eurozone crisis for now as improved global economic data has calmed nerves. Speculation for further easing by the Federal Reserve has dampened after weekly jobless claims fell to the lowest level since May 2008. This followed robust regional manufacturing data from the Philadelphia and New York regions. With annual consumer price inflation data, scheduled for release later today, expected to remain stable, we expect the US Dollar to trade lower against Sterling and the Euro.

Euro – European Markets

The Euro has firmed against the US Dollar this morning, amid reports that Sweden and Russia are willing to provide aid to the Eurozone through the IMF. Yesterday’s successful Spanish bond auction and better-than-expected manufacturing Purchasing Managers’ Index across the Eurozone have been taken positively by traders. However, the ECB President, Mario Draghi, highlighted persistent funding concerns as he cautioned that the central bank’s bond buying programme was not limitless. Adding to the pressure, Fitch has downgraded seven major global banks, while S&P cut its rating on ten Spanish banks. With a light economic calendar in the Eurozone today we expect the Euro to trade with an upward bias against the US Dollar. All eyes are set on the French bond auction worth €7 billion slated for early next week, which could be a key event for driving sentiment towards the Euro.

Other Currencies – Highlights

The Kiwi Dollar has strengthened against the US Dollar this morning as upbeat US economic data and robust Spanish debt auctions yesterday calmed markets and prompted investors to move towards high yield assets. Markets have even taken in stride the contraction in New Zealand’s manufacturing PMI for November. In a major development today, New Zealand’s central bank has allowed Kauri bonds rated at least “AA-“ for use as collateral in the wake of ratings agencies stripping some nations of their top credit grades. We expect upbeat risk sentiment to continue to favour the Kiwi Dollar today against the US Dollar.