France Rating Affirmed, Belgium Downgraded, US Avoids Shutdown

France avoided a downgrade on Friday but its outlook was lowered. Belgium did get downgraded by 2 notches from Moodys late Friday. In the US, a government shutdown was avoided with a last-minute deal. NZD and AUD outperformed on Friday while fellow commodity currency CAD lagged. EUR speculative shorts hit a new record high against the dollar. Fridays premium trades are in progress. The EUR long is all done

On Friday, the euro got an early life in US trading after Italys parliament voted in favour of austerity measures. EUR/USD climbed as high as 1.3084 but the sellers attacked almost immediately, pushing the pair back to 1.30.

Later, Fitch affirmed Frances AAA-rating but lower its outlook. At the same time, it put Spain, Italy Ireland and others on creditwatch negative, meaning a downgrade is likely before the end of January. The move was expected after similar announcements from Moodys and S&P.

Minutes before the end of trading, Moodys downgraded Belgium by two notches. Another negative headline was the withdrawal of next weeks planned Portuguese bond sale.

US lawmakers met in a rare Saturday session to approve a $915B bill to avoid a government shutdown. The legislation will extend a payroll tax cut and unemployment benefits for two months. The success of the bill should boost risk appetite at the open but the effect will be minimal our feeling is that the market priced in a last-minute deal.

US economic data was a minor factor as headline CPI was reported at 2.4%, slightly below the 2.5% expected. The lower inflation numbers and Fed QE operations sparked a rally in bonds that, in turn, weighed on USD/JPY.

The Canadian dollar lagged after data showed foreigners investing less in Canadian securities. The data is generally ignored so the drop in CAD at the same time was more likely due to oil prices and/or year-end flows.

The unusual dichotomy in commodity currencies underscores the year end effect. Liquidity will continue to dry up in the year ahead and the market will grow increasingly choppy and inexplicable.

Gold rebounded $22 after 4 days of selling but the 200-day moving average at $1620 is now acting as resistance. The S&P 500 gained 0.3% to 1219.

CFTC Positioning Data

Speculators continue to gain confidence in euro shorts as the net EUR shorts hit a record short at 116K from -96K

Yen longs fell by 3K to +36K.
The GBP position improved to -40K from -44K.
CAD made a similar improvement to -14K.
AUD longs expanded 4K to +35K.