Euro, French rating ahead of SNB

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The single currency managed to arrest its slide yesterday versus the pound but made new 11 month lows versus the US dollar with continual pressure being exerted as traders become more and more nervous as to the continent’s funding position and the attitude of the politicians to solve it. The ratings agency Fitch downgraded a slew of French banks and it seems that the French government is expecting a similar move from Standard & Poor’s soon for the country’s sovereign rating. The French Foreign Minister Alain Juppe was actively briefing yesterday that it would not be a problem if France was downgraded and it would merely be a road bump; this is known as lowering expectations and we expect some form of downgrade to happen, possibly on Friday afternoon.

UK unemployment continued to be a thorn in the side for the coalition yesterday although the amount of people claiming unemployment benefits only rising by 3,000 compared to an expected increase of 13,700. The unemployment rate also remained solid at 8.3% however Cameron was whacked at PMQs by the latest youth unemployment number that now sits at 1.027m. It had little effect on the pound overall as traders kept their minds solely on the euro.

The auction of Italian debt yesterday saw yields once again push higher against a similar sale a month ago. Italy got shot of EUR5bn worth of debt but at a rate of 6.47% against 6.29% previously. Demand was strong but the pressure remains in that, while yields are no longer pushing records, the long-term unsustainability of these numbers is also apparent. Italy paying 6% on 5yr money is a problem but it is a catastrophe if growth is not turned around and spending is not decreased. Debate was ongoing in the Italian parliament over the lastest batch of measures but unions have promised strike action in a bid to prevent a “social explosion”. Spain is the next country to auction debt with sales of 5, 8 and 10yr debt due at 09.30.

Overnight the attitude to risk has taken another leg lower after weak manufacturing data from both Japan and China. The Japanese “tankan” survey showed a larger than forecast deterioration in business sentiment of the large manufacturers due to Europe’s debt woes, a stronger yen and Thai floods. Meanwhile, China’s manufacturing output fell again in December after new orders fell. This is ahead of services and manufacturing data from France and Germany that are not expected to provide any comfort for the bulls.

The market is also watching Switzerland carefully this morning as the SNB is expected to announce whether it will raise the ‘floor’ in EURCHF from 1.20 to 1.25 in an attempt to combat the rapid appreciation of the franc versus the euro. This has the potential to strengthen the euro although I believe it will not happen and EURCHF will fall.

Other pieces to look out for today include UK retail sales at 09.30 and US industrial production at 14.15.

Indicative Rates Sell Buy
GBPEUR 1.1855 1.1884
GBPUSD 1.5484 1.5489
EURUSD 1.3024 1.3047
GBPJPY 120.44 120.72
GBPAUD 1.5563 1.5590
GBPNZD 2.0607 2.0629
GBPCAD 1.6013 1.6042
NZDUSD 0.7493 0.7520
GBPZAR 12.93 12.98
USDZAR 8.3544 8.3896
GBPPLN 5.3803 5.4104
EURJPY 101.44 101.72

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