Euro Lower On Italy Downgrade, ECB Asmussen's Comments

Euro weakened overnight after S&P downgraded Italy's long term sovereign credit rating to BBB from BBB+, just two notches above junk level. The negative outlook suggested that there could be another downgrade this year or next. The rating agency noted "further worsening of Italy's economic prospects coming on top of a decade of real growth averaging minus 0.04 per cent." It lowered the GDP forecast in 2013 to -1.9%, down from prior projection of -1.4%. Also weighed on Euro was ECB executive board member Asmussen's dovish comments. He noted that the central bank's forward guidance of keep rates at record lows for an "extended period of time" goes beyond 12 months. And he didn't rule out further use of standard and non-standard measures, including another round of LTRO. EUR/USD dropped to as low as 1.2755 and is set to taken on 1.2746 support. Break will have larger bearish implications.

San Francisco Fed William's tried to calm market from concerns of Fed's tapering in a paper titled, A Defense of Moderation in Monetary Policy. He said "the claim that the Fed is responding insufficiently to the shocks hitting the economy rests on the assumption that policy is made with complete certainty about the effects of policy on the economy." He criticized that as "nothing could be further from the truth." He said "uncertainty about the effects of policies is especially acute in the case of unconventional policy instruments such as using the Fed’s balance sheet to influence financial and economic conditions." Meanwhile, he argued that deploying unconventional policy would allow "gradualism in shifts in the stance of policy".

IMF lowered global GDP growth forecast to 3.1% in 2013, down from prior projection of 3.3% made in April. For 2014, global growth is projected to be 3.8%, down from prior 4.0%. It noted that downside risks to global growth prospects "still dominate" and "the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the U.S. leads to sustained capital flow reversals."US growth forecast was lowered to 1.7% in 2013 and 2.7% in 2013, down from prior 1.9% and 3.0% respectively. Eurozone is expected to contract -0.6% in 2013, worse than prior -0.3%. Japan growth was raised to 2% in 2013, up from prior 1.6%. China growth is projected to be 7.8% in 2013, down from prior 8%.