France hit by Moody’s downgrade, ahead of Greece decision

Ten months after ratings agency Standard and Poor’s, Moody’s ratings agency pulled the trigger on France’s triple A rating last night, downgrading it to Aa1 with a negative outlook citing an uncertain fiscal outlook along with a gradual sustained lack of competitiveness and deteriorating economic prospects.

The agency also warned that the ability of the French economy to respond to further shocks was diminishing due to the country’s high exposure to the rapidly deteriorating Spanish and Greek economies.

It now remains an open question before the last of the big three, Fitch, follows suit given they already have France on a negative outlook.

Moody’s also stated that the growth assumptions of 0.8% in 2013 were somewhat optimistic as are the assumptions for 2014.

While the loss of the triple A rating will be a blow to French prestige the reality is it probably won’t really change that much in terms of the economic outlook for the country given the economic challenges facing all of Europe’s economies.

It could however have a trickledown effect down through the French banking system, with potential downgrades for French banks, feeding through into higher borrowing costs, due to the perceived lower credit rating of the sovereign.

What it probably also do is spice up the conversation at today’s special EU finance ministers meeting which has been convened to discuss the disbursement of the next aid tranche for Greece.

There still remains a degree of uncertainty with respect to what decision EU leaders will come to with talk that the EU would be likely to give the go-ahead to disburse €44bn to Greece on 5th December as long as a number of prior actions are completed.

This does somewhat fly in the face of comments yesterday from Dutch and German officials that there would be no final decisions on Greece at today’s meeting, and this really seems to be the most likely outcome.

It also doesn’t square with IMF chief Christine Lagarde’s recent insistence on a proper sustainable solution to the problem of Greece’s finances. In positioning herself in such a way she now leaves herself open to a lack of credibility if she then backs away from this position, and agrees to another temporary solution.

As with all things Europe we will have to wait and see, but the likelihood of a fudge, in the form of a partial payment seems the most likely solution, as opposed to a long term solution and markets should guard against getting their hopes up.

EURUSD – yesterday’s rebound above the 200 day MA at 1.2810 might well herald a move towards 1.2850 trend line resistance from the 1.3150 highs, as well as the 1.2910 area and 50 day MA, but the move isn’t really conclusive. Support now comes in at 1.2700 trend line support from the 1.2050 lows, a break of which could well target 1.2605 which is 50% retracement of the 1.2045/1.3170 up move. The current rebound needs to overcome the 1.2900 level to stabilise and target 1.3000.

GBPUSD – the pound continues to struggle for momentum above the 1.5900 area, and needs to get above the 1.5960 area to really push on towards 1.6050.
To push conclusively lower we would need to see a move towards and break below 1.5790 trend line support from the 1.5270 lows as well as 1.5660.

EURGBP – the euro appears to be launching another attempt at the highs last week and the 200 day MA at 0.8080, after last week’s failure to push below the 0.8000 level. A move beyond the 0.8080 level could well retarget the October highs at 0.8165.
On the downside trend line support comes in at 0.7980 from the July lows at 0.7755.

USDJPY – the 81.80 area remains the key obstacle to a move higher towards the March highs above 84.00. Last week also saw the US dollar close above the weekly cloud for the first time since April, which should be bullish.
The 79.75 level should now act as support; otherwise we’ll end up heading back towards the November lows at 79.00.