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December 2nd, 2012 at 10:19 am

Additional Downgrades could Follow.

Late on Friday, Moody’s downgraded its rating of the European Stability Mechanism, as well as that of the European Financial Stability Facility. Both funds lost their Aaa status, dropping one notch to Aa1 level and the outlook is negative. The agency justified this move, saying that recent downgrade of France lowered creditworthiness of the funds, based on sizable French contribution. Seemingly, the risk of default is slightly elevated now.

One could argue that rating agencies lost all credibility few years ago, for some unknown reasons markets still pay attention to them. In this light, more sovereign ratings could be on the chopping block. Currently the UK’s triple-A status is in jeopardy, which is on the negative watch list of some agencies. This could happen as early as this week, following the “Autumn Statement”, which will disclose official forecast for public debt and borrowing. Let us not forget about the USA. Never mind the outcome of the “fiscal cliff” – in March the country will reach the debt ceiling again and rating agencies cannot possibly overlook that. Well, maybe they can, but that would only prove they should not be taken seriously.

From immediate perspective, it remains to be seen if Moody’s action will have affect on the Euro. The news came late in the day, in the last few minutes of Forex trading, but after the US markets had already closed. The EUR-USD rapidly dropped about 25 pips and this trend could accelerate on Monday. On the other hand, if this weakness is for real, we should have seen even bigger decline. Markets were very thin then and much easier to move. Clearly, the outcome is still up in the air, so we need to wait and see what happens after the opening before making a better informed decision.

The EUR-CAD is a good example. Its hourly chart reveals a strong shooting star on Friday, which would indicate a downside bias now. However, the sentiment will not change on technical basis unless the latest support is broken. At about 1.2885, it is the level to watch for possible short entries. From this perspective, an objective of 50 pips is certainly possible, if the price indeed cracks the support.

Several currency pairs have been very choppy lately, as if waiting for catalyst of some kind. The NZD-JPY is one of them, forming a large consolidation on the hourly chart. It spans roughly from 67 to 68, which suggests eventual move of about 100 pips. I do not have a directional bias and will play a breakout either way, looking for about 70-80 pips. Volatility is almost certain to increase this week, perhaps even dramatically. After all, we have five central banks meetings and several employment data releases. And, of course, opening gaps are always possible. Have a great forex and binary trading week!

Mike K.

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