After expecting the Eurozone economies to be downgraded for so long, we now have to live with them. After Friday’s move by S&P that saw France lose its triple A credit rating, the question for markets to ask now is what will demand be like at the French bond auctions this week? The first auction takes place at 1400GMT/ 0900 ET today, when Paris will try to sell short-term debt. We believe that today’s auction should go ahead without too many problems; the biggest test will be on Thursday when France tries to sell long-term debt.
The problem is that now France has lost its triple A rating, it jeopardises the top rating for the Eurozone’s rescue fund, the EFSF, since it contributes one fifth of financial guarantees to the fund. Since Germany came out today and said that no more money will come from Berlin (finance minister Schaeuble said this morning that German guarantees to the EFSF are sufficient just the way they are) this could put people off owning Eurozone assets if the financial safety net looks like it is threatened at this critical stage in the debt saga.
So the long-term repercussions from the Friday’s downgrades could be, well, more downgrades and more uncertainty that the policy responses from Germany etc. will be inadequate. But the impact on the sovereign debt markets has been fairly minimal so far. French 10-year bond yields jumped at the open to 3.12%, but have since retreated. Likewise, Italian yields are also lower today and well below the crucial 7% zone, however spreads with German Bunds have continued to widen.
So what does this mean? We believe that in the absence of action from European lawmakers, especially Germany’s reluctance to do anything other than push for closer fiscal union, makes it even more likely that there will be more aggressive action to stem the crisis from the ECB. This is good: the ECB has the power to buy unlimited quantities of bonds, which it has been doing from the London open today, according to reports. This has helped Italian bonds overcome LCH Clearnet’s raising of margin requirements after it was downgraded on Friday. However, as the ECB steps into the policy gap left by European politicians it will put pressure on its already stretched balance sheet, which is bad news for the euro. Hence we believe the direction is still lower for the euro.
But in the short-term the major FX crosses are consolidating after Friday’s large moves lower. EUR/USD is getting stymied at 1.2680, but if it does break above here there is a cluster of hourly smas waiting in the wings that could thwart a recovery. In the medium-term we believe the euro will grind lower, with 1.2600 acting as initial resistance and then 1.2570. It’s worth remembering that the speculative community are holding record short euro positions, so expect some pretty sharp short-covering rallies on the euro’s journey lower.
Interestingly, a Japanese official came out today and said that now is not the time for Japan to intervene to weaken the yen. So EUR/JPY could continue to work its way lower even after reaching fresh euro-era lows earlier today. EUR/JPY looks like it is failing just below 97.40, 97.00 is likely to be tough resistance so we could be in for some tight range-trading conditions today.
The commodity bloc is fairing pretty well and its reaction to the Eurozone downgrades was actually fairly muted. In an environment where currencies like the Aussie prove to be more resilient to European woes then we expect EUR/AUD to continue to weaken. In the medium-term we target 1.20 for this cross. However, in the near-term this pair could be choppy. If the Aussie dollar isn’t as affected by Europe anymore, it is still extremely sensitive to news flow from China. GDP, industrial production and retail sales are released for Q4 and December tomorrow, ahead of the New Year holiday that starts on Sunday. Growth is expected to moderate in the Asian powerhouse, however the consensus is that growth won’t fall off a cliff because Beijing will continue to loosen monetary policy. Thus, a drop in the growth rate doesn’t necessarily mean that the Aussie will come off tomorrow, especially if it boosts the chance of a near-term RRR cut from the PBOC.
Economic data is thin on the ground today and the US is out on holiday. However, Europe still provides plenty to chew over. Apparently talks between Monti and Merkel on January 20th have been postponed. According to the Greek finance minister PSI talks are set to resume on Wednesday after running into problems on Friday, and the Troika have arrived in Athens along with a delegation from Germany. Never a dull moment.
The problem is that now France has lost its triple A rating, it jeopardises the top rating for the Eurozone’s rescue fund, the EFSF, since it contributes one fifth of financial guarantees to the fund. Since Germany came out today and said that no more money will come from Berlin (finance minister Schaeuble said this morning that German guarantees to the EFSF are sufficient just the way they are) this could put people off owning Eurozone assets if the financial safety net looks like it is threatened at this critical stage in the debt saga.
So the long-term repercussions from the Friday’s downgrades could be, well, more downgrades and more uncertainty that the policy responses from Germany etc. will be inadequate. But the impact on the sovereign debt markets has been fairly minimal so far. French 10-year bond yields jumped at the open to 3.12%, but have since retreated. Likewise, Italian yields are also lower today and well below the crucial 7% zone, however spreads with German Bunds have continued to widen.
So what does this mean? We believe that in the absence of action from European lawmakers, especially Germany’s reluctance to do anything other than push for closer fiscal union, makes it even more likely that there will be more aggressive action to stem the crisis from the ECB. This is good: the ECB has the power to buy unlimited quantities of bonds, which it has been doing from the London open today, according to reports. This has helped Italian bonds overcome LCH Clearnet’s raising of margin requirements after it was downgraded on Friday. However, as the ECB steps into the policy gap left by European politicians it will put pressure on its already stretched balance sheet, which is bad news for the euro. Hence we believe the direction is still lower for the euro.
But in the short-term the major FX crosses are consolidating after Friday’s large moves lower. EUR/USD is getting stymied at 1.2680, but if it does break above here there is a cluster of hourly smas waiting in the wings that could thwart a recovery. In the medium-term we believe the euro will grind lower, with 1.2600 acting as initial resistance and then 1.2570. It’s worth remembering that the speculative community are holding record short euro positions, so expect some pretty sharp short-covering rallies on the euro’s journey lower.
Interestingly, a Japanese official came out today and said that now is not the time for Japan to intervene to weaken the yen. So EUR/JPY could continue to work its way lower even after reaching fresh euro-era lows earlier today. EUR/JPY looks like it is failing just below 97.40, 97.00 is likely to be tough resistance so we could be in for some tight range-trading conditions today.
The commodity bloc is fairing pretty well and its reaction to the Eurozone downgrades was actually fairly muted. In an environment where currencies like the Aussie prove to be more resilient to European woes then we expect EUR/AUD to continue to weaken. In the medium-term we target 1.20 for this cross. However, in the near-term this pair could be choppy. If the Aussie dollar isn’t as affected by Europe anymore, it is still extremely sensitive to news flow from China. GDP, industrial production and retail sales are released for Q4 and December tomorrow, ahead of the New Year holiday that starts on Sunday. Growth is expected to moderate in the Asian powerhouse, however the consensus is that growth won’t fall off a cliff because Beijing will continue to loosen monetary policy. Thus, a drop in the growth rate doesn’t necessarily mean that the Aussie will come off tomorrow, especially if it boosts the chance of a near-term RRR cut from the PBOC.
Economic data is thin on the ground today and the US is out on holiday. However, Europe still provides plenty to chew over. Apparently talks between Monti and Merkel on January 20th have been postponed. According to the Greek finance minister PSI talks are set to resume on Wednesday after running into problems on Friday, and the Troika have arrived in Athens along with a delegation from Germany. Never a dull moment.