Fitch Cuts Irish Credit Rating to BBB+

The main theme of today is the ratings downgrade of Ireland, but markets still performed reasonably well on the day, with Asian and European boursesup, while U.S. markets demonstrate a lack of momentum. The main spots of weakness were India and China, with market mood dampened in the latter by concerns about rising interest rates, and in the former by the recent bout of corruption scandals that have shaken the government of PM Manmohan Singh. Against this background, the EURUSD barely moved, while the USD was little changed against its major peers. The USDJPY pair is  testing its 100-day MA, with little followup so far. Among commodities, after failling to make much downward progress during this week, gold started the day in the red, but seems likely to end it in the black.

Fitch downgrades Ireland`s credit rating to BBB+

Today Fitch cut Ireland`s sovereign credit rating by three notches to BBB+, to two levels above speculative grade, in a move that was widely anticipated by the markets. We think that BBB+ is too high for the country, given the uncertainties that surround its financial independence, but Fitch is still the most realistic among the three major credit rating agencies.

The CDS market is reported to be pricing in losses of about 20% for senior holders of Irish debt due for the next 3-5 years, and Fitch`s move has not had a perceptible impact on the bond or CDS markets, as it does not go much beyond the certification of the obvious. Still, West European sovereign CDS generally ended the day with a higher yield today.

3-month Euribor was unchanged today at 1.029%. USD Libors show little movement. In other Eurozone news, German HICP inflation has continued to trend higher, with the latest number coming at 1.5% y-y vs. the previous 1.3%. It is unlikely that the Eurozone inflation will become a serious problem next year, but if the trend continues, as it is possible it will do with the Euro depreciating, the ECB will find it even harder to engage in further easing while maintaining any remaining degree of credibility.

BoK leaves interest rates unchanged

The Bank of Korea is reported to have left interest rates unchanged after moving to increase them last month in response to rising inflation. Nonetheless, the pressure to keep the won weak is strong, and the bank is not likely to change the current stance for some time to come. Korea`s recovery has not been very robust, and low rates make sense from more than one angle.

In the rest of Asia, we have yet more evidence that Asians are committed to reining in speculative inflows in a decision by China`s SAFE to the effect that the interbank FX market will close at 4:30 pm (8:30 GMT) from next Monday, revising the existing regulations that ends operations at 5:30 pm. In a similar move, they are reported to have advised HK not to drop the peg, since, we think, that would accelerate the fall of the USD and greatly complicate their management of the yuan.The Chinese are obviously unnerved by the massive amount of speculative cash flooding the country, and hope to be able to limit the impact on the domestic market through cosmetic measures such as this latest announcement, but as long as appreciation expectations remain, there is very little that they can do to reverse the trend, especially because there are few alternatives in today`s world against the safe bets provided by the USDCNY pair.

We conclude by noting the announcement by Goldman Sachs today that it is revising downward its previous EURUSD forecasts for the next year, in  acknowledgement that they have been over-optimistic in assessing the performance of the Eurozone, and the troubles of the periphery.  The bank is still bullish, however, with a 6-month target of 1.45 vs. previous 1.50, and a 12-month target of 1.50 vs. a previous 1.55.