Daily FX Market Outlook by AceTrader 28-1-2011

Market Review – 27/01/2011 23:25 GMT

Yen tumbles across the board as S&P cuts Japanese debt rating

The Japanese yen sank against its counterparts on Thursday as the credit ratings agency Standard & Poor lowered Japan’s debt rating one step to AA- from AA on concern that the country’s sovereign debt ratio would rise, however, the report also indicated the outlook on the long-term rating was stable as Japan’s strong external balance sheet and monetary flexibility partially offset the pressures stemming from the fiscal deficits which was expected to remain high in the next few years and ‘peak only in the mid-2020s’.

Japanese Finance Minister Yoshihiko Noda declined to comment on the downgrade. The greenback swiftly surged against the Japanese yen after the downgrading announcement and penetrated Wednesday’s high of 82.62 to 83.22 in European morning before retreating and trading sideways for the rest of the day. Other currencies also strengthened against the yen as eur/jpy, gbp/jpy and aud/jpy rose from 112.42 to 114.02, from 130.60 to 132.68 and from 81.68 to 82.44 respectively.  
  
The single currency rose to a fresh 2-month high of 1.3760 against the dollar in New York trading on European Central Bank (ECB) Executive Board member Lorenzo Bini Smaghi’s comments about inflationary pressure in Bologna together with the release of worse-than-expected U.S. weekly jobless claims and durable goods orders data, however, profit-taking capped intra-day gain there and price subsequently fell to around 1.3679 in New York afternoon session before recovering.  
  
ECB Executive Board member Lorenzo Bini Smaghi said in the speech that ‘sharper rises in imported goods’ carried an inflationary threat and keeping lending support in place for too long could prolong problems in the banking sector. His speech echoed recent hawkish comments from ECB President Jean-Claude Trichet, adding speculation that ECB may need to hike eurozone interest rates at some point this year.  
  
Cable dropped briefly earlier in the day from 1.5944 to 1.5880 in European morning but the release of better-than-expected U.K. CBI retail sales balance data (37.0 in January versus economists’ forecast of 35.0) together with active cross-buying in sterling (eur/gbp extended the fall from Wednesday’s high 2 1/2 month’s high of 0.8673 to a session low of 0.8581) later pushed price higher to 1.5991 before retreating on dollar’s broad-based rebound in New York session.   
  
Governor of the Reserve Bank of New Zealand (RBNZ), Dr Alan Bollard, announced to keep overnight call rate (OCR) unchanged at 3.00 percent in January at the New Zealand Parliament on Thursday. He said ‘it is prudent to keep the OCR low until the recovery is more robust; economic outlook remains consistent with the December projections; but rates are likely to increase modestly over next two years as major trading partner activity continues to expand and forward indicators of activity have firmed’. The kiwi jumped from 0.7642 to 0.7746 after his hawkish comments before pullback briefly to 0.7672, and later climbed higher to 0.7747 in New York session.  
  
On the data front, U.S. Labour Department showed that the jobless claims increased 51,000 to 454,000 in the week ended January 22 versus consensus forecast of 405,000. U.S. Commence Department reported that U.S. durable goods orders in December fell 2.5 percent against the economists’ median estimate of an increase of 1.5 percent and a drop of 0.3 percent in previous month. U.S. National Association of Realtors later showed that monthly index of existing U.S. home sales gained 2.0 percent in December to 93.7.  
  
Economic indicators to be released on Friday include:  
  
Japan household spending, Tokyo CPI, National CPI and unemployment rate, Switzerland KOF indicator, and US GDP data, PCE, personal consumption, employment cost index and University of Michigan survey.

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