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Sterling Drops as Downgrade Warnings Weigh

Last updated 3/15/2010 5:04 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• China's Wen Jiabao - no yuan revaluation in the near term
• Moody warns on UK, US debt
• Nikkei up mildly, Shanghai down -1.2% lowest close in 5 weeks Europe called lower
• Oil at $80.76/bbl
• Gold at $1105/oz.

Overnight Eco

• JPY Household Confidence 39.8 vs. 40.6 eyed
• CHF PPI -0.3% vs. 0.2% eyed
• EUR Employment Change n/a
• GBP Rightmove HPI 0.1% vs. 3.2% last

Event Risk on Tap

• CAD New Motor Vehicle Sales expected at 0.0%
• USD Empire State Manufacturing Index expected at 20.9
• USD TIC Long-Term Purchases expected at 37.9B
• USD Capacity Utilization Rate expected at 72.7%
• USD Industrial Production expected at 0.1%

Price Action

• USD/JPY very quietly contained at 90.50-90.70 as traders await FOMC
• AUD/USD finds support at 91.30 after early Asia sell off -focus on RBA minutes tonight
• GBP/USD short squeeze to 1.5200 fails and the unit tumbles through 1.5100
• EUR/USD consolidates at 1.3750 as traders await resolution of Greece bailout

A quiet night at the start of week’s trade  with very little event risk on the economic calendar in both Asia and Europe and most high beta FX contained to very tight ranges, with the exception of sterling. Sterling tried to test the 1.5200 level in early London trade but failed miserably falling 100  points lower as shorts came out of the woodwork. The UK economic calendar carried only the Rightmove housing data which printed much weaker at 0.1% versus 3.2% the month prior. However, the true reason for sterling’s weakness was a report by Moody's noting that both US and UK are closer to losing their triple A ratings as the costs of servicing their massive fiscal deficits begin to rise.

“We expect the situation  to further deteriorate in terms of the key ratings metrics before they start stabilizing, “ said Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, Moody’s expects US to spend about 7%  of its revenue to service its debt in 2010 and almost 11% in 2013 while UK is projected to spend 9% and 12% respectively. Although both Anglo-Saxon economies face serious challenges in managing  their fiscal deficit problems, the UK  is far more vulnerable that the US to a potential downgrade because of the relatively small size of capital markets and high dependence of its economy on  the finance sector for growth.  Some recent reports suggest that the Bank of England may have purchased as much as 90% of new issuance of government debt – a pace that’s clearly unsustainable - indicating that the structural problems in UK are likely to worsen as the year progresses.

In Asia meanwhile Chinese Prime Minister Wen Jiabao  dismissed the possibility of a yuan revaluation in the near term noting concern over the “the unsteady, uncoordinated and unstable development of the Chinese economy," and even bringing up the specter of a “double-dip” recession. As we wrote earlier,  we continue to believe that,” Chinese will be unwilling to move on the issue of currency revaluation until they are absolutely certain that the US economy can join China as the second major pillar of global economic growth in 2010. Up to now, the Chinese have almost single handily spurred the global economic recovery through their massive fiscal stimulus programs that helped fuel domestic driven demand. However, Chinese officials continue to be concerned over the fragility of global recovery and are unlikely to make any meaningful adjustments to their currency policy until they are certain that the US recovery is sustainable. In practical terms that indicates that Chinese policy officials will not even consider making a move on the revaluation front until US labor markets show several months of positive job growth.”

Finally in the North America the eco data will be second tier with Empire, TICs and Industrial Production all hitting the tape before the equity markets open. Traders are looking for mild pullbacks in all the releases from the month prior, but if the data surprises to the upside, it will once again reaffirm the bulls scenario that the US recovery is gaining momentum as we move towards the end of the first quarter and should help push USD/JPY to 91.00 in New York trade. The pair continues to trade cautiously ahead of the FOMC meeting, but if the consensus builds that the US economic activity is gaining momentum it can break out from its 89.00-91.00 range and target 95.00 as the summer approaches.

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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.