Moody’s Takes Regions Lower

With what dust that was kicked up by the weekend’s Spanish regional elections settling yesterday trading was very sideways through the session. GBP/EUR did attempt a break lower in the afternoon session as a result of flows surrounding a particularly large options expiry in EUR/USD.

This near term pull lower has increased the probability, and strengthened our view, that the pair come lower in the short term. EUR/JPY is closing in on 4 month highs, while EUR/USD is pushing at the levels that it saw post the Federal Reserve’s decision to announce QE3; it naturally has to follow that in the absence of strong data from the UK that EUR/GBP should also rise.

That’s not to say that news flow will not be a harbinger for the single currency. Despite the victory for the government in the Galician polls, Moody’s moved to downgrade five Spanish regions overnight “driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs”.

This isn’t anything new, of course, but these moves were to either move regions into “junk” status initially or to further exacerbate their lack of quality. The regions concerned were Castilla-La Mancha, Andalucía, Murcia, Extremadura and Catalonia which still needs to hold its referendum on Spanish independence on November 25th. The rating of the Spanish state still sits on a knife-edge at the moment and has been saved from going “junk” by the promise of aid from the ECB.

That being said the auction of Spanish short-term debt this morning is unlikely to be much of an event. Yields have been coming lower nicely over the past few weeks and we would expect an auction to confirm, not counteract, this.

Overnight the final Presidential debate took place on the topic of foreign policy. Frequently the discussion was switched back to the US economy as opposed to what was needed overseas and the entire Eurozone crisis avoided attention; much like the fiscal cliff did in the second. Most outlets seem to have the President winning this scuffle although we doubt it will have moved the polls to wildly. Our belief that the President retains his position is therefore unchanged.

The data calendar is quiet today although Richmond manufacturing will be interesting following mixed manufacturing surveys from the States through the past few weeks. This takes place at 15.00.