Major currencies rebound

Thanks to better than expected US housing data.

OCBC Treasury Research said:

Major currencies rebounded on Monday on better than expected US housing data. IMF has upgraded both AUD and CAD to official reserve asset status, underpinning AUD.

The AUDUSD climbed back above 1.0400. The upside for the EURUSD was capped by Moody’s downgrade on France. The USDJPY remained bid as the opposition party LDP has decided to include a review of BOJ policy into its campaign with a possibility of raising inflation target to 2% from 1% set this year.

For today, market will watch Eurogroup meeting for clues on global risk sentiment. Meanwhile RBA minutes and BOJ target rate will also be closely monitored by investors.

Asian currencies received supports on Monday on positive risk sentiment. The USD-Asia remains heavy today, eg, USDMYR dipped below 3.0600 this morning. Nevertheless, we think the downside for USD-Asia may be limited on corporate demand for USD going into year end.

DBS Group Research meanwhile noted:

Yesterday's recovery in EUR/USD, which rose above 1.28 during the New York session, went well until the surprise rating downgrade on France after US markets closed. Moody's joined Standard & Poor's in removing France's triple-A sovereign debt rating, leaving the country with a triple-A rating from Fitch.

The decision was predicated on a deteriorating economic outlook which elevated the uncertainty to France's fiscal outlook and reduced its resilience to future shocks in the Eurozone.

Moody's was probably also motivated by last week's report that Eurozone officially entered into a technical recession in 3Q12. Note, however, that real GDP in France actually expanded 0.2% QoQ in 3Q12, with the -0.1% contraction in 2Q12 revised up to flat.

The question now is whether yesterday's correction presents a buying opportunity for the euro. When S&P removed France's triple-A rating on January 13, EUR/USD was interestingly attempting to move above 1.28 ahead of the second Long Term Refinancing Operation by the European Central Bank in February.

Like today, the rating downgrade knocked the EUR/USD lower to a bottom of 1.2623 on day of the downgrade itself. Thereafter, EUR/USD resumed its focus on the LTRO and appreciated back above 1.28 to a high of 1.3486 on February 24.

That said, today's fall in EUR/USD from its high of 1.3139 on October 17 to the low of 1.2660 on November 13 was not due to Eurozone worries but to US fiscal cliff fears. Yesterday's rally was attributed very much to market's hopes that the White House and Republicans would find common ground to avoid a repeat of the political brinksmanship that cost America one of its triple-A rating in August 2011.

To sustain risk appetite, EUR/USD has to quickly get over France's rating downgrade and quickly move back up above 1.28. That is assuming US Federal Reserve Richmond President Jeffrey Lacker is correct in his expectation for US lawmakers to reach a deal to avert the fiscal cliff.