Downgrade distress upsets risk appetite (21st)

USD

The dollar rose after risk appetite sank on concern France might lose its AAA rating and after law-makers hit a deadlock over how to reduce the deficit in Washington. Concerns in Europe began after a warning from credit agency Moody's to France that slow growth and rising borrowing costs were affecting its credit worthiness. Meanwhile, the U.S Congressional Joint Select Committee, a 12-member panel of Democrats and Republicans failed to reach agreement on how to find 1.2tr in budget cuts by 23rd of November. Wednesday is the deadline for cutting a deal - the absence of which could lead to 'trigger cuts' amounting to the same amount, which could lead to a possible rating downgrade for the U.S. On the data front the Chicago Fed National Activity Index (October) gave a print of -0.13 vs 0.19 and -0.20. Existing Home Sales came in at 4.97m vs 4.80m expected and 4.9m last month; which gave a MoM print of 1.4% vs -2.2% expected and -3.2% previous.

EUR

The euro fell following reports that the credit reference agency Moody's had given a warning that France's AAA credit rating was in jeopardy given the spread of contagion from smaller states to core nations. The warning came as borrowing costs continued to rise and growth prospects for the gallic nation deteriorated to only 1.0% in 2012. Meanwhile the Bundesbank also lowered German growth forecasts to between 0.5 – 1.0% in 2012, down from a forecast of 1.8% made back in June. However, the single currency fared better than most other risk-correlated currencies as there were reports of heavy bids from euro-zone banks repatriating large sums of money from abroad, which had been generated from selling assets – now a preferred method of fund-raising instead of issuing stock or debt. On the data front euro-zone Current Account deficit (n.s.a) in September fell to -2.5bn vs -7.2bn in the previous month and 0.5bn vs – 5.9bn in the August for the seasonally adjusted amount. Overall the outlook remains bearish for the euro as the large inflows to banks must in itself be an indication a fall in the value is the consensus prediction.

GBP

The pound fell after risk aversion increased, mainly as a result of renewed euro-zone debt fears but also after it emerged that law-makers in America had failed to reach agreement on how to trim1.2tr from the U.S debt burden, which is necessary to maintain investor confidence. It appeared the bi-partisan committee set up in the summer to oversee the shaping of an austerity plan failed to agree on virtually anything and they now only officially have until Wednesday to come up with recommendations. The pound also fell against the euro, although this was more as a result of euro-zone banks repatriating funds from selling assets abroad which kept the euro artificially well bid than any comparative advantage over sterling, which still benefits from safe haven flows into Gilts. Concerns over the U.K's fragile economy and heightened QE fears also weighed after Martin Weale's comments last week continued to echo, that there was a “very strong case” for extending the Central Bank's QE programme next year. On the data front there was data covering the U.K housing market, with the Rightmove house price survey showing prices unchanged YoY at 1.2% and -3.1% MoM in November vs 2.8% in the previous month.

JPY

The yen traded mixed after risk appetite soured and haven demand for the currency increased as a result. Investor fears of intervention may have kept participation somewhat muted, however, after reports of government plans to increase its intervention 'war-chest' by 35tr sent a strong message of intention to the markets. A significant amount of economic data from Japan saw the Trade Deficit increase by more than expected to -0.46tr yen in October compared to expectations of a -2.0tr yen fall. Meanwhile Merchandise Trade Exports fell to -3.7 vs -0.3 expected and 2.3 previous, in October. It was thought that a combination of weaker demand in European markets because of the crisis there, the effect of the Thai floods on supply chains and the strong yen all influenced the drop in Exports which had been keeping up surprisingly well thus far. Also out on Monday was the All Industry Activity Index MoM in September which fell by -0.9% vs -1.0% forecast and -0.3% in the previous month. The Leading Index was also out at 91.5 vs 91.6 and Convenience Store Sales ?which rose by 14.1% vs 4.0% previous.