World Morning Update: Et Maintenant, Le Deluge

The French credit rating was downgraded late last night by Moody’s and will be kept on a negative outlook on the basis of stumbling growth, lack of competitiveness and a confused and unpopular fiscal strategy. The fact that the French banking system is so heavily involved in the debt of Greece and Spain will also be weighing on the agency’s mind.

The reaction for the euro was sharp, but over quickly. EUR/USD gapped from 1.2820 to 1.2765 while GBP/EUR rose to 1.2458 from 1.2410 but those losses have since been made back. The thing about ratings downgrades is that they are normally a reaction, or at least a reflection, of or to current market psychology; the downgrade is already priced in.

The Economist’s recent front cover with a bundle of baguettes made up to look like dynamite came in for a lot of stick (pun intended). We have been negative on France since the election of Francois Hollande and while France may not become the Spain of 2013, there is the definite prospect for further pain there.

The focus has now shifted back to the Eurogroup meeting about Greece due today. Comments overnight have rowed back some of the positivity seen yesterday with the usual suspects of the Austrian, German and Finnish Finance Ministers raising the prospect that the Greeks may not get what they want. Hopefully this is just the expectations game being played. Comments from Germany yesterday also suggested that the negotiations around the EU budget, due Thursday, could be kicked into next year as well.

Overnight the Bank of Japan meeting failed to really get anything going and the focus will shift to December’s meeting at which further easing will now be expected. We expect USD/JPY to eventually grind higher towards 82.00 but we would expect resistance to cap gains around there.

Minutes from the Reserve Bank of Australia also failed to kick things off overnight following their decision to hold rates earlier this month. The board stated that while some effects of recent monetary policy easing may have helped issues of late however further changes may be forthcoming and therefore another rate cut may not be ideal just yet but still appropriate in the near term. We are expecting two cuts over the next 6 months from the RBA. AUD/USD was weaker on the session following the announcement.

While Greece will dominate headlines we have a Spanish auction of short-term debt this morning and a speech from Ben Bernanke to the New York Economic Club this afternoon. We are looking for further sideways trade for the day from the major crosses as interest remains low into the Thanksgiving break.