EUR USD (1.2645) Since last November, when the agency erroneously published a downgrade notice, the market had reckoned that S&P would cut France’s triple-A. The anxiety in the market on Friday was, therefore, more about the extent of the cut (one notch or two) and the other downgrades. Thus, the euro’s decline was greater on the unconfirmed reports about the S&P downgrade than on the confirmed news. This morning observers are divided in their opinion on the actual impact of the downgrade. There are some who see the consequences as benign since France still enjoys the same credit status as the US, which survived its downgrade relatively unscathed. What’s more, the sovereign bond spreads in the eurozone were not consistent with France’s triple-A status even before it was downgraded. Since the markets still maintain a cautious approach to the judgements of the rating agencies when it comes to economic policy, one could reasonably ask the question whether it really matters: isn’t AA+ anyway the new AAA? The difficultly here is that the downgrade is not taking place in isolation. Its impact on effectiveness of the pan-European rescue vehicles, or on the asset quality of bank reserves, is just the start. The change is taking place against a shifting backdrop of falling growth and a seemingly intractable Greek PSI problem. So, as long as it trades below our (lowered) stability point at 1.2950, we will see the euro as broadly at risk of a drift to 1.2490/510.
Click here to read the full report: GDPBD01162012
Deutsche Bank
Fixed Income Research – Global