Markets hold their breath!

The week began with the re-emergence of risk aversion in the currency markets, following the death of North Korean leader, Kim Jong II. Additionally, Moody’s downgraded Belgium’s credit rating while Fitch lowered France’s credit outlook on Friday with the impact yet to be felt by markets. At home, upbeat housing data has failed to make a meaningful impact on Sterling against the majors. With holiday season around the corner and a light economic calendar today, we expect a “risk-off” trading sentiment to prevail in the markets.

Pound Sterling – UK Markets

In its Quarterly Bulletin the BoE highlighted the current weakness in British household consumption amid a deteriorating economic environment. Compounding problems further George Osborne’s efforts to overhaul UK financial regulation received a blow after the joint committee on the Draft Financial Services Bill urged the government to rethink its proposed structural reforms. Last week’s slew of upbeat economic numbers have continued with positive housing data released this morning. However, it failed to provide a substantial boost to the Pound against the majors. With an eventful week ahead in terms of economic releases, Sterling’s movement is expected to take direction from the BoE minutes scheduled on Wednesday and developments in the Eurozone.

US Dollar – US Markets

Concerns over political instability in the Korean peninsula grabbed centre stage in the early morning session, after the North Korean state television revealed that the national leader, Kim Jong II, had died. Uncertainty over his successor and heightened security on the Korean borders spurred demand for the greenback as a safe haven asset. Markets remain worried over a possible downgrade to the sovereign debt ratings of several European nations, after rating agencies sprung into action on Friday. The French bond auction scheduled for today is expected to reveal the impact of Fitch’s move to lower the credit rating outlook of France. Data awaited today includes the NAHB housing market index, which is expected to remain unchanged for December.

Euro – European Markets

Fears of an imminent credit ratings downgrade for major Eurozone economies, exerted pressure on the Euro this morning. Fitch lowered France’s credit outlook to “Negative” from “Stable” on Friday and placed Italy, Spain, Ireland, Belgium, Slovenia and Cyprus on “Ratings Watch Negative”. Additionally, Moody's cut Belgium's credit rating by two notches, citing risks to economic growth. The Euro has since managed to pare its losses against the majors in recent trading. Meanwhile, the ECB President, Mario Draghi, echoed fears of challenging funding conditions in the Eurozone. Inventors are keenly focused on the ECB’s 3 year long-term refinancing operation on Wednesday, which is aimed at reviving the struggling interbank lending and funding market. Today all eyes are on the Eurozone Finance Ministers’ discussion over additional IMF funding and the mechanics of the fiscal compact. We expect the Euro to take cues from the outcome of the French debt auctions worth €7 billion, scheduled for later today.

Other Currencies – Highlights

The Australian Dollar edged lower against the US Dollar after reports of the death of the North Korean leader, Kim Jong Il. Currency markets were already worried following action by major credit rating agencies on EU sovereigns late on Friday. Additionally, concerns over a possible slowdown in the Chinese economy weighed on the Australian Dollar, with data indicating that house prices in most of China's major cities declined for November. Market sentiment remains subdued awaiting tomorrow’s Reserve Bank of Australia’s (RBA) minutes of its most recent policy meeting.