Thursday, July 14, 2011

Moody's Warning on the United Stated - 14 July 2011

Previous session overview

After the Moody's warning on the U.S., the dollar was down across the board Thursday, with the euro receiving some respite from Europe's own debt problems and from banking stress test worries. 

The euro zone this week is conducting stress tests on 91 European banks, with results due out Friday. News that all 13 German banks participating in the tests have passed also aided the euro, traders said.

By 0625 GMT, the euro was trading at USD1.4209, up from USD1.4165 in late New York business Wednesday. The dollar was also weaker against sterling and the Swiss franc, although it was fractionally higher against the yen.

The EURJPY is at JPY111.91 vs JPY111.82; the USDJPY is at JPY78.94 vs JPY79.01. China must assess the risks it faces as a major investor in U.S. Treasurys, and could adjust its FX assets to reduce that risk, dealers say.

The Pound is higher against the USD, but lower against the EUR this morning with investors largely focused on the prospects of further monetary easing in the US. The news has lifted global bourses, which congruently has added to investors risk appetite, thus boosting higher yielding assets. The pound has however, remained under pressure against most of its other counterparts after a report showed that the number of Britons filing jobless-benefit claims increased at the fastest pace in more than two years.

The Australian dollar rallied sharply Thursday as Moody's decision to put its U.S. debt rating on review for possible downgrade hampered that country's currency at the benefit of most others. Still, some of the big rally in the Australian dollar late in New York action that continued early in Asia stalled as the session wore on, with significant risks upcoming in Europe and technical factors at play. 

That profit-taking saw the Australian dollar reverse from an intraday high of USD1.0797. At 0620 GMT, the Australian dollar was at USD1.0737, up from USD1.0634 late Wednesday. Against the Japanese yen, the Australian dollar was at JPY84.80, up from JPY84.50.

Market expectation

Favorable euro-zone stress test results could result in a knee-jerk improvement in risk appetite, but major investors are likely to scrutinize the results further, and banks that passed the tests by a slim margin are likely to feel additional heat for raising capital.

The USDJPY faces strong headwinds amid the turbulent debate on the U.S. debt ceiling, but market participants' mounting caution over possible Japanese JPY-selling intervention should offer the pair some support, say dealers. There are lots of rumors flying around the market after the sharp fall in the yen earlier, and even without any clear signs of intervention, investors are certainly more on edge now that Tokyo could step in at some point.

European stocks are set to drop at the open Thursday, after Moody's warning on U.S.'s debt rating rattles market confidence.

Looking ahead to Thursday's economic agenda, euro-zone harmonized consumer price inflation figures are due 0900 GMT, while in the U.S., retail sales are published at 1230 GMT, together with weekly jobless claims and producer price index releases.