Another Brick in the Wall

There have been several developments to note, but price action has been minimal through the European morning.  

The biggest talking point today is Moody's decision to cut France's rating one notch to AA1 and maintaining a negative outlook.  This saw the euro jerk lower in thin pre-Asian activity to ~$1.2765, which should now offer initial support, but as participation increased, the euro recovered fully and even briefly traded above yesterday's North American high ~$1.2820.   Resistance extends toward $1.2845. 

As we noted initially, Moody's move matches what S&P did back in January.  Nothing that Moody's said was new news, as we and the Economist pointed out recently.   It is slightly noteworthy that Moody's decision comes on the heels of the new fiscal measures announced by the government.  

French bonds are under-performing a little, with the 10-year yield up 4 bp (Germany 10-year yield is up 3 bp).  French share are off 0.2% at pixel time.  However, there may be fallout elsewhere.  Moody's has indicated that the EFSF and ESM ratings will be impacted by France's downgrade.  French corporates and banks may be subject to downgrades following the sovereign action as well.  

Meanwhile, we are still awaiting the euro zone finance ministers' decision on Greece.  We expect them to approve new funds and overrule the IMF's desire for a longer-term solution now.  Before a check can be cut, which Greece will largely sign back over (in time) to its official creditors that own about three-quarters of Greek debt, a few parliaments, including Germany, need to formally approve. 

The Bank of Japan's meeting concluded without fresh action.  The odds of new measures after the BOJ expanded its asset purchase program in both September and October were always slim.  Yet, there was some speculation, given the political pressure brought to bear.  BOJ Governor Shirakawa was defensive of his measured approach, but also critical of LDP Abe's aggressiveness, without mentioning names. 

Shirakawa's 5-year term ends in April and his two deputies (Yamaguchi and Nishimura) will step down in March.  The LDP will have its way, even if its declaratory policy is bolder than its operational policy, but it will have to wait.  The dollar has been confined to yesterday's trading range, which makes its the second consecutive session that has been entirely spent above JPY81.  Look for the consolidative tone to persist through the North American session.  Early Wednesday in Tokyo, the government is likely to report the fourth consecutive monthly trade deficit.  

The minutes from the Reserve Bank of Australia meeting and subsequent comments from the governor are further encouraging the markets to anticipate a rate cut in early December.    It is appears to be about 3/4 priced into the OIS market and a little more in the forwards.  The RBA seems both somewhat surprised and somewhat concerned about the Australian dollar's strength given the deterioration of the terms of trade.

Recall that the RBA cut its growth forecast a week and a half ago partly due to the anticipated drop in investment in the resource space.   Like the euro, the Australian dollar extended yesterday's gains.  The $1.0425 area brought in fresh sales.  A break now of $1.0370-80 would suggest loss possibly back to last week's low near $1.0285 initially.