The euro gained over 0.25% against the pound yesterday for the second day in a row after credit ratings agency Fitch Ratings said it expects France to keep its AAA credit rating. The euro and other risk based currencies like the Australian and Canadian dollars were also up on renewed risk appetite following the publication of the Chinese trade data which increased speculation that the Chinese authorities may be on the threshold of taking steps to stimulate its economy.
Whilst Fitch may be on the verge of cutting the credit ratings of several euro zone countries currently under review by up to two notches by the end of January, the fact the euro zone’s second biggest economy seems to have escaped the axe was sufficient according to galvanise the euro yesterday.
According to a report in Reuters, Fitch expects the euro zone to “muddle through the crisis” and that Fitch is likely to decide on the euro area’s ratings by the 31st of January. The countries under review are Spain, Italy, Belgium, Ireland, Slovenia or Cyprus and all face a downgrading by one or two notches although both the German and French AAA rating are not expected to be downgraded this year.
Fitch’s head of global sovereign ratings David Riley told reporters that there is a “significant chance” that Italy’s rating will fall. According to Riley, the problem is the lack of a “firewall” that would remove the liquidity crisis premium of the country’s debt. “At the moment we don’t have that and that’s a serious concern with regard to Italy,” he said.
Chinese trade data also underpinned currency movements on Tuesday. China’s exports and imports grew at their slowest rate in over two years in December, fresh figures showed, boosting hopes of further monetary easing.
Conversely, the US dollar weakened following Fitch’s reassurance about France and following the Chinese data as demand for its ‘safe haven’ appeal weakened.
Today, the markets have opened in a cautionary mood ahead of tomorrow’s Bank of England rate decision. The 9 members of the Monetary Policy Committee (MPC) are widely expected to keep UK rates at their historic low level of 0.5% and leave its quantitative easing target untouched at £275 billion although a further increase is anticipated by some next month.
Compiled by Tony Redondo