FX Markets Shrug Off Negative Headlines

Risk appetite has managed to stabilize overnight in the face of disappointing headlines. Some comfort was taken from FT The Financial Times reported French President Sarkozy stated that "an unprecedented financial crisis will lead us to take important, very important decisions in the coming days". While with some slightly overly optimistic reporting the Guardian newspaper suggested that Germany and France have agreed to form a leveraged EFSF worth €2trn. Although shortly after, Dow Jones quoted an unnamed source as saying the report was completely false. Surprisingly, these articles were able to overshadow the news that Moody’s had downgraded Spain’s sovereign rating by two notches to A1. Moody’s is now a single notch below S&P and Fitch at AA-.

Asian equity markets are in mildly positive territory with the Nikkei is trading 0.21% whilst the Hang Seng is broadly higher at 1.25%. FX markets were able to shrug off the downgrade buying risk along the way. In the FX space, EURUSD was able to rally, after yesterday’s very choppy session, to 1.3829 and AUDUSD regained the 1.0300 handle after a mild dip to 1.0232 (stronger WPAC leading index helped). Traders remain cautions as German policy makers continue to downplay expectations for this weekend summit. Trader are guardedly watching Frances CDS climbing and yield spreads widening. Headlines involving Europe will be the primary driver of FX price actions. With plenty of risk events to talk about in the next few days, expected trading to remain volatile. Critical vote in Greece tomorrow and Friday's meeting of Eurozone finance ministers and Sunday's EU summit will surely be flash points.

Looking ahead, the data calendar includes the latest BoE MPC minutes, EZ construction output, Norges bank rate announcement (see Central bank Preview), US CPI, Fed's Beige book release, US Housing starts and building permit. The Bank of England minutes for this month's policy meeting and traders will be watching for clues surrounding the banks decision to renew their asset purchase program. In addition giving yesterday whopper of an inflation print (5.2% yoy highest read since 2008), questions will be asked if member can continue to support QE. As for the Norges Bank it’s nearly universal that the central bank will hold policy rate at 2.25%.