S&P Strikes Again!

By: Hugo McDougall in Forex Consultant on Jan. 24, 2011

Just when you begin to think that there couldn’t be a more archaic, irrelevant group of financial companies like the ratings agencies, you get slapped back to reality and realize that they do still carry some weight. These are the same companies, after all, that gave the highest ratings to garbage, toxic mortgage-backed debt and were partially responsible for the financial collapse of 2008.Today we will get a special report from our government (another largely irrelevant body but that’s a topic for another day) where they will essentially attempt to place blame for the financial crisis. Predictably, there will be THREE versions of the report, one representing each political party’s view and another which will likely be dismissed by both parties but will actually be closest to the truth. I guess that’s what $9.5 million buys these days in Washington DC.

So where was I? Yes the ratings agencies. Overnight, S&P downgraded Japanese debt one notch citing the nation’s debt burden and the belief that the government lacks a coherent strategy to deal with it. This marks the first downgrade in nearly 9 years, which leads me to ask: Why now? Or more to the point: Where have you been?

This is NOT news, folks. The Japanese debt burden as a percentage of GDP has been the highest in the world for many years, so all of a sudden some junior analyst decides that today it might be a problem? Get real. One of the reasons that this will be a non-issue has to do with the fact that Japanese Government Bonds (JGBs) are owned almost entirely by Japanese institutions already!

Nevertheless, this downgrade has sent the Yen screaming lower, as if this is going to have a huge effect on Japan. Methinks not.

In other news from the Pac Rim, the Australian government is claiming that the recent flooding down under will cost the country half of a percent of GDP, and want to impose a one-time levy (tax) on its citizens to help pay for the recovery.

This morning another major snowstorm has hit the East Coast which could slowdown activity. Stock futures are higher to start the morning on corporate earnings, though commodities are lower.

In the forex market:

Aussie (AUD): The Aussie is lower on the news of the hit to GDP they are going to take as a result of the flooding and the potential levy which could reduce consumer spending.

Kiwi (NZD): The Kiwi is higher against all but the Euro as last night’s rate policy meeting left rates unchanged but the policy statement maintained that inflation was at comfortable levels. So while no rate hikes may be forthcoming any time soon, the economic climate appears to be ripe for growth.

Loonie (CAD): The Loonie is mostly lower as oil prices have retreated yet again to 86.50. With no news to speak of, expect the Loonie to trade on risk themes today.

Euro (EUR): The Euro is trading higher as money flows make their way out of Yen and to other currencies. While there was mixed economic data out of the Euro zone, the big news is that ECB President Trichet pledged to do what’s needed to ensure price stability. Read potential changes to monetary policy, including rate hikes. (Click chart to enlarge)

Pound (GBP): The Pound is higher across the board despite declining house prices which reflect the fastest decline in demand for houses in nearly three years. While this may seem counter-intuitive to some, this could actually help inflation return to acceptable levels which would lessen the possibility of a rate hike in the face of austerity measures.

Dollar (USD): The Dollar is higher against all but the Euro and Pound as Durable Goods orders declined 2.5% vs. an expectation of a gain of 1.5%. In addition, initial jobless claims rose back to 454K vs. an expectation of 410K which would move the economy closer to leaving the 400s and entering the 300s. This economic data is discouraging, but not completely unexpected.

Yen (JPY): The Yen is weaker across the board in what can only be described as an obvious case of the obvious. Tonight Japan will report a slew of economic data, though it may not be as market-moving s the downgrade. I’m guessing the BOJ isn’t too unpleased with this development right now. (Click chart to enlarge)

When I think of ways to analyze currencies, one of the last things I think about is the impact of the ratings agencies. These companies wield entirely too much power based on the historical job they did many years ago before the days of bond insurance.

Now they are an outdated model that is no better, no worse than your average investment bank or uber-informed investor. However, it is days like today that remind me that just because I think something no longer matters, doesn’t mean its true.

So today is a welcome relief to the Japanese government and Central bank, who have essentially been rewarded for incompetence and now have the weaker currency they desire without have to lift a finder. Sake bombs for everyone!

Similar Posts:

Share

Post comment