Morning Report

Richard Driver, Analyst After rumours of a French credit downgrade sent the euro tumbling on Friday, Standard& Poor’s dealt nine eurozone states the blow it has been warning of for weeks. The news undermined the positivity that had emerged as a result of ECB President Draghi’s surprisingly upbeat press conference on Thursday. The markets will continue to mull over Friday’s events, particularly European traders who have not yet responded. There is a dearth of scheduled announcements today, though Draghi will be speaking this evening.
STERLING/EURO: Eurozone downgrades give sterling a cent and a half push in the right direction. France and Austria lost its AAA credit rating from S&P on Friday (which represented a one notch cut), whilst other eurozone states including Spain, Italy and Portugal were dealt a two-notch blow. The move was expected by many, though it did catch the market a little off guard by coming sooner than expected, and the euro weakened as you would anticipate. Sterling is trading up at a healthy €1.21 level this morning and we are betting on further euro-weakness this week. With eurozone data consistently weak, the euro is unlikely to get much respite in the coming sessions.	FORECAST
STERLING/US DOLLAR: Sterling continues to trade at multi-month lows against the safe-haven dollar as the floodgates of eurozone headlines reopen. US consumer sentiment data was impressive on Friday, hitting an eleven-month high and pointing to further gains in US economic improvement. Today is Martin Luther King Day in America, so we will have to wait until tomorrow for some further US economic indicators. Global stocks inevitably finished in the red on Friday, with the US dollar a key beneficiary. Still though, UK gilts remain a safe-haven and sterling sees investment by association, so there was no major side for this pair, which is trading at $1.53.	FORECAST
EURO/US DOLLAR: Eurozone debt downgrades trigger a two-cent collapse for this pair and confidence is likely to be scarce this week. The euro resumed its downtrend against the US dollar on Friday. Reports merged that Greek negotiations on private sector involvement (haircuts) have stalled, but the blanket downgrade in the eurozone naturally stole the headlines. Bond yields are likely to feel the heat this week as a result, regardless of the ECB’s liquidity operations. The euro is trading below $1.27 this morning and there is a chance of a brief relief rally today, but beyond this we are betting on further euro losses as the picture worsens once again.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Even the negative eurozone headlines can’t seem to drive sterling higher against commodity currencies like the aussie dollar. Australian jobs data was poor again last night, contracting for the fifth month out of six. Home loans data was better, possibly helped by the recent Reserve Bank of Australia’s interest rate cuts. The labour market issue in Australia is a real concern though, and we may see it push the RBA to cut rates again soon. This evening’s Asian session brings a key Chinese figure – final quarter 2011 GDP. The aussie will be driven by this data release. This pair is trading just above 1.48, and only a stronger than expected Chinese figure is likely to drive sterling lower.	FORECAST
STERLING/NEW ZEALAND DOLLAR: The kiwi dollar proved remarkably resistant to the eurozone debt downgrade headlines. The kiwi dollar is at all-time highs against the euro, suggesting it is a key beneficiary of the eurozone’s current woes. Certainly, we have been expecting the kiwi dollar to weaken off in line with reduced risk appetite. Tonight’s session brings some kiwi business confidence data but this pair looks likely to test lows down at 1.90 at some point this month. If a blanket downgrade in the eurozone doesn’t hurt the kiwi dollar, it’s hard to see what will at the moment.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling remains weak against the Canadian dollar, which continues to benefit from improvements in the US economy. Friday’s excellent US consumer sentiment data bodes well for the Canadian economy and its currency. There was more good domestic news as a result of a monthly trade surplus, though US trade balance data was the poorest we have seen in five months. Oil prices also dipped three cents to $111 per barrel, but sterling remains weak against the loonie.   Sterling is trading at 1.56, and support levels need to kick in today if another slide is to be avoided.	FORECAST
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