Dollar and Yen Appreciate as Ratings Concerns Grow

Last updated 12/8/2009 7:15 AM ET (GMT -5) 7 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Moody's - UK and US has resilient rather than resistant AAA ratings
• UK IP/MP flat vs. estimates of growth
• Asia and European bourses slightly lower
• Oil slides furtrher below $74/bbl -$73.90/bbl last
• Gold steady at $1163/oz.

Overnight Eco

• NZD Manufacturing Sales -5.1%
• JPY Bank Lending 0.2% vs. 1.4% last
• JPY Current Account 1.38T vs. 1.59T
• JPY M2 Money Stock 3.3% vs. 3.5%
• GBP BRC Retail Sales Monitor 1.8% vs. 3.8%
• AUD Current Account -16.2B vs. -16.7B
• AUD NAB Business Confidence 19 vs. 16
• JPY Economy Watchers Sentiment sharp drop to 33.9 vs. 40.3 eyed
• JPY Leading Indicators 89.7S vs. 88.7%
• GBP Manufacturing Production 0.0% vs. 0.5% eyed

Event Risk on Tap

• CAD Housing Starts expected at 158K
• CAD BOC Rate Decision expected at 0.25%
• USD IBD/TIPP Economic Optimism expected at 49.8

Price Action

• USD/JPY strengthens on dovish Bernanke comments
• AUD/USD generally holds its ground best at 9120 as NAB confidence improves
• GBP/USD hammered to 1.6300 on Moody's comments and weak IP data
• EUR/USD drips lower to 1.4800

Dollar continued to appreciate against the euro and cable, but not against the yen in early European trade today as traders reacted to latest warnings on sovereign debt from ratings agencies. Emerging-market equities fell as rating companies highlighted the risk of government deficits with Moody’s Investors Service noting that deteriorating public finances in the U.S. and U.K. may “test the AAA boundaries” while Standard & Poor’s said it may cut Greece’s rating for a second time this year.

Moody’s stated that both US and UK debt were “resilient” rather that “resistant” in their AAA status noting that “U.K. faces an “inexorable deterioration of debt affordability.” The news sent pound tumbling to 1.6300 level and the unit was not helped by the soft Industrial and Manufacturing Production data which printed at 0.0% versus 0.5% eyed.

We have been bearish on pound for more than a week, arguing that the currency remains highly vulnerable to a correction given the continuing credit problems in the Middle East and the evident slowdown in economic activity at home. Today’s disappointing IP/MP data suggests that growth in the UK manufacturing sector may have once again stalled in the aftermath of the car scrapage program and that news bodes badly for any sustained recovery into Q1 of 2010.

Meanwhile the yen gained strongly gathering pace on the raft of warnings from the ratings agencies and the realization that the Fed is unlikely to ratchet rates as early as mid 2010. Yesterday’s relatively dovish comments by Fed Chairman Ben Bernanke knocked the wind out of the dollar’s rally against the yen which now trades more in correlation with bond market yields rather than stock market gyrations. If the US curve continues to flatten the pair could see further downside.

With US calendar once again barren of any event risk, the early focus in North American trade will be on the Bank of Canada’s rate decision and monetary policy statement. Despite the improving labor condition in the Great White North, the BOC is likely to maintain its dovish posture given the relative strength of the loonie. The BOC runs the risk of stoking a massive real estate bubble as Canadian housing prices hover near record highs, but for the time being Canadian monetary officials will likely err on the side of caution.

FX Upcoming

Comments (7)

FXDragon

December 09, 2009 at 09:45 AM ET

That stupid euros gonna jump so bad so soon maan. I just cant wait. Its just acting stupid. Probably hedge funds delivering.

hsbc

December 08, 2009 at 08:23 AM ET

any thoughts on eur?

hsbc

December 08, 2009 at 07:37 PM ET

street talk of greek banks buying eur to supplement their losses on greek govies to meet capital requirement. this is nothing new but after a close to 450pts fall in eur, we can get ready to buy eur.

FXDragon

December 08, 2009 at 08:52 PM ET

Eur would not fall if it was bought massively right.

hsbc

December 08, 2009 at 10:45 PM ET

Yes. but all depends on whether mkt buys into it. my fear is that it turns around and gets sold off on panic

Doobp

December 08, 2009 at 11:16 AM ET

with usd rallying, and greece high deficit, eur may not be that optimistic anymore. Moreover, it had fell below the 50 daily ma yesterday. 50ma was a very strong support line.

but overall, i dont see a strong reason for decline in eur beside USD rallying and trichet being comfortable with the movement.

middle eastern are asking for a decent size of euro. I hope they will be more offers to come. =(

d@t

December 08, 2009 at 11:57 PM ET

Ironically Japan has lower sovereign credit ratings than some of these places yet the yen benefits when their ratings are reduced. I'd like to take a bet against the yen on those grounds, but I'd need to know when the credit rating agencies might next be making review announcements..

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.