FX Morning Update - lots going on...

France downgraded, BoJ set to lose independence, US Fed’s Bernanke on tap – not just another quiet day in FX land today despite US holiday week.

France downgrade
A brief morning update today. Overnight (late evening in the Europe last night) we had Moody’s downgrading France’s sovereign debt rating by a notch from AAA to Aa1 due to its fiscal outlook and economic situation. This was no huge surprise, but Hollande’s government hasn’t done much to inspire confidence for bond investors in France. France’s 10-year yield has been wider than Germany’s for a long time – about 70 bps and trades around 2.05% – but hasn’t widened any further in recent days. EURUSD was sharply lower in a kneejerk reaction, but made back all losses overnight before trading in the middle of the last 12 hours range ahead of the European open. See story. 

Bank of Japan
The Bank of Japan meeting saw no change of policy – not a huge surprise as they are likely to keep relatively quiet until the other side of the December 16 lower house elections in Japan and what will likely see the LDP’s Abe ascend to the post of Prime Minister. On that note, we have reports on the potential of an ever more aggressive LDP stance on the BoJ issue. They would like to coordinate efforts with the BoJ to halt the yen’s strength and ensure inflation again. See this story. 

RBA Minutes
Forward rate predictions for the RBA eased a couple of ticks lower after the publishing of the RBA minutes. These indicated a continued bias to easing rates and the hope that lower rates will stimulate housing and business investment (as if that will work on the downside of an imploding credit bubble…especially with an insanely overvalued currency…)

Levels

EURUSD: 1.2800/25. Break opens up old range toward 1.3170. Downside pivot is 1.2770

AUDUSD: 1.0425 is last resistance area head of range highs toward 1.0480. Day pivot at 1.0390

USDJPY: 81.00 and 80.67 in particular are the big supports - the latter is the Ichimoku weekly cloud and flatline support. 81.61 is high thus far for the cycle.

EURGBP: 0.8055 area is yesterday's high and 200-day  moving average looms at around 0.8080. Downside swing at 0.8000

Today’s calendar

At 1330 GMT, we have US Housing Starts and Building Permits. One article I read recently pointed out that new housing is more popular than it should be because underwater homeowners are stuck in their existing homes, which mean they move slowly, and that banks are slow to “bleed” overtaken inventory to the market to avoid crushing prices. So the US housing strength may be a bit less pronounced than it appears on the surface and we should all realize we are talking about a slow march back towards normalization – not a boom.

All eyes on Bernanke’s appearance at the Economic Club of New York today at 1715 GMT. This used to be one of the favourite places for Alan Greenspan to hint at new policy directions and there is a huge outstanding question on the fate of the Fed’s Operation Twist programme, which is set to expire at the end of the year. So let’s see if Bernanke hints at a desire for new debt monetization to replace the Twist or if we see something more novel, like the purchase of other assets, on the table.

Today also features an EcoFin meeting of European Finance Ministers that starts late in the European day today. The subject of the meeting is aid to Greece. The EU core refuses to consider debt reduction for now, while the IMF is getting impatient as it sees that Greece will never be on a sustainable path without debt forgiveness. Political sources in Greece indicated that Greece’s leadership says it will not consider plans to fire tens of thousands of state employees as part of a debt reduction plan