Rating Agencies Strikes Again

Trading sentiment in high yield currencies has ebbed a little owing to the looming threat of rating downgrades in the Eurozone. Fitch yesterday warned that Italy faces a “significant chance” of a rating cut this month. This has turned market focus onto the Merkel-Monti meeting today and Italian and Spanish bond auctions starting tomorrow. Additionally, German GDP growth numbers, released this morning, matched market estimates and so are likely to favour the German bond sales scheduled for later today. At home, shop price inflation for December slipped to its lowest level in 16 months and the total trade deficit widened for November.

Pound Sterling – UK Markets

The Pound is hovering around the 1.2100 level against the Euro, following growing uncertainty over the Eurozone debt market. Further boosting the Pound were comments from Fitch Ratings that it has no plans to change the UK’s credit rating in the first half of this year. Meanwhile, Sterling performed well in early trading but has since retreated marginally against the US Dollar after the BRC shop price inflation slipped for December to its lowest level in 16 months, strengthening market perception that the improvement in consumer morale was on account of price cuts borne by retailers. Data just released reveals that the trade deficit in the UK widened for November. As investors await the outcome of the BoE’s monetary policy stance, slated for tomorrow, the British Chamber of Commerce cautioned that additional stimulus from the central bank may not be enough to boost the fragile economy.

US Dollar – US Markets

Uncertainty following the Fitch warning of a possible downgrade to the Italian debt rating, has placed the US Dollar on a stronger footing against the Euro and Sterling this morning. On the domestic front, San Francisco Fed President, John Williams, and Sandra Pianalto, head of the Cleveland Fed, opined that they expect inflation to decline this year, which could pave way for additional stimulus from the already stretched central bank. A significant feature on today’s economic calendar is the Fed Beige Book survey which is expected to indicate a moderate improvement in conditions across the twelve districts. Further strengthening the uptrend in the economy retail sales figures, scheduled for release tomorrow, are expected to indicate a rise for December. We expect the US Dollar to trade higher against the majors today.

Euro – European Markets

The Euro is trading under pressure against the US Dollar, ahead of today’s German bond auctions worth €4 billion. Moreover, yesterday’s inconclusive meeting between Merkel and Lagarde, along with market speculation that Greek debt holders may face forceful restructuring, continued to dampen investor sentiment. Although Fitch Ratings affirmed the “AAA” rating for France; threat of imminent downgrade weighed on Spain and Italy. Highlighting the fragility of the region’s financial sector, data indicated that the ECB’s overnight deposit level reached a new all-time high of €482 billion on Tuesday. Data released this morning indicated that German economic growth slowed in 2011. However, the numbers were in line with market consensus. Among other releases investors await the revised Eurozone GDP figures for the third quarter.

Other Currencies – Highlights

The Kiwi Dollar is trading higher against the US Dollar amid market speculation over expansionary monetary policy in China, New Zealand’s second largest export destination. Markets expect that data scheduled for release tomorrow may show that Chinese inflation eased for December to its lowest level since September 2010. However, gains in the currency were capped after data indicated that the Westpac McDermott Miller Employment Confidence Index in New Zealand, dropped in the fourth quarter to its lowest level since June 2009.