Sterling Lower On Downgrade, Yen Dives On BOJ Talk

Sterling opened the week sharply lower in reaction to last week's downgrade by Moody's. Meanwhile, Yen also dived on talk of BoJ head nomination. Aussie was weighed down by weaker than expected manufacturing data from China. Euro is steady awaiting election results in Italy. Markets would likely get exit polls later today while full results are expected by early Tuesday. Dollar and other major currencies are also relatively steady so far. We'd probably seen focus remains on sterling and yen weakness today. In particular, USD/JPY breached recent high of 94.45 and is likely resuming recent up trend to 95 psychological level. EUR/GBP also also breached last week's high of 0.8764 and is possibly heading to 0.88 level.

Moody's downgraded the UK sovereign rating by 1 notch from AAA to AA1. The rating agency stated that the country's weak economic growth "poses an increasing challenge to the government's fiscal consolidation efforts". Moreover, Moody's indicated that while the country's "debt-servicing capacity remains very strong and very capable of withstanding further adverse economic and financial shocks, it does not at present possess the extraordinary resilience common to other AAA-rated issuers". Chancellor of the Exchequer Osborne said in an article on Sunday that "Britain has a debt problem, built up over many years, and we have got to deal with it." And he warned that "if we don't deal with it, interest rates will soar, homes will be repossessed and businesses will go bust."

It Japan, it's reported that prime minister Abe is close to nominating former BoJ deputy governor, current Asian Development Bank president Kuroda as the next BoJ governor. Comparing to another candidate Muto, Kuroda is seen as a more aggressive one as he advocated an inflation target more than a decade ago. And he even pushed for a 3% target back in 2002. Though he said that the current 2% target is appropriate. Also, it should be noted that just earlier this month, Kuroda emphasized the need to end deflation and he noted that BOJ has "really substantial room" for expanding stimulus and easing. Opposition DPL said last week that it won't oppose to nominees whose name were reported in the press and thus it's likely that Kuroda would be confirmed.

In China, the preliminary HSBC PMI manufacturing index unexpectedly dropped to 50.4 in February, down from 52.3 in January. That was worse than expectation of 52.2. HSBC noted that "the slower pace of manufacturing expansion partly reflects the impact of a week-long Chinese New Year holiday and partly the continued softness of external demand." But, "the Chinese economy is still on track for a gradual recovery." However, some economists criticized that the sharp drop in the index couldn't be explained by the Chinese New Year effect.

Latest CFTC data showed that positions in Sterling and Canadian dollar continued to deteriorate in the week of February 19. Euro net longs dropped slightly to 19.1k, down from 24.1k and compared to Feb's high of 38.0k. Sterling positions continued to deteriorate for the fifth week with net shorts rising to 23.4k, up from 16.8k. Yen net short rose slightly to 65.9k, up from 61.3k. Aussie net longs dropped further to 44.0k, down from 54.1k and way off January's high of 97.0k. Canadian dollar position deteriorated for the fifth week with net longs dropping to 19.4k, down from 26.6k, comparing to this year's high of 66.7k.