FX markets traded on a relatively calm note on Monday morning, despite the ratings action on Friday. News flow was generally thin in the European session as investors assessed the impact of the S&P downgrades. The euro traded in a fairly narrow range although signs of a full recovery were checked by comments from Moody’s, which said that France’s AAA rating could come under pressure if the debt/GDP ratio continues to rise and if the debt crisis worsens. EURUSD traded in a range 1.2626 and 1.2681, USDJPY 77.13-76.37. while equities were trading flat at the time of writing. On Friday, S&P stripped France and Austria of their AAA ratings at the New York close, downgrading each by one notch to AA+. The move was part of a mass review of the ratings of 15 out of the 17 Eurozone sovereigns announced on Dec. 5. In all, the ratings of nine Eurozone countries were cut. Although the French downgrade was expected, the euro fell very sharply late on Friday as Eurozone government officials warned that downgrades were imminent. Crucially, Germany’s rating was affirmed at AAA − the ratings of Belgium, Ireland, Finland, Netherlands, Estonia and Luxembourg were also unchanged. Other countries were not so fortunate: Italy, Spain, Portugal and Cyprus each suffered a two-notch downgrade. This was enough to see Italy fall to BBB+, taking it below the important A-/BBB+ threshold for the first time and only three notches above ‘junk’ status. Apart from France and Austria, the ratings of three other countries were cut by a single notch: Malta, Slovenia and Slovakia. Elsewhere, talks between Greece and the IIF on the terms of a voluntary debt restructuring appear to have broken down, at least temporarily. Our Eurozone rates strategists expect these negotiations to ultimately fail, paving the way for a hard Greek default. Given the overwhelmingly euro-negative news and the likelihood of more to come, we are entirely comfortable to remain short EURUSD as a trade recommendation. The US is on holiday today for Martin Luther King Day.
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