Risky assets came under renewed pressure in Asian session, as concerns over endless liquidity and sovereign downgrades weighed on investors. Asian regional indexes drifted lower, with the Shanghai composite down 1.73% at the time of writing. Gold broke the 1136.00 support, which had been previously the backstop for two major sell-off. JPY gained across the board, despite weaker than excepted growth figures. Traders pushed USDJPY down to 87.90, while carry trades such as CADJPY continued to collapse, trading down to 82.55. Perhaps the most subdued trading was the range bound EURUSD, trading between 1.4670 - 1.4760. Markets are still worried over the downgrade of Dubai government related entities and yesterday's Fitch downgrade of Greece. Interestingly, historically downgrades have come in waves, a fact which has not been lost on nervous traders. While Greek policy makers have made extra efforts to restore confidence through public statements of fiscal austerity in 2010, Swedish finance minister Borg commented Greece needs to get serious about its deficit problems. Doesn’t sound like external policymakers are too convinced.
Yesterday, the BoC held rates steady in a unanimous vote, while reiterated their commitment to keep ultra low rates till mid-2010. The market was disappointed, as it wanted to hear a slightly less dovish accompanying statement, which weighed on the CAD. We believe that it's just a matter of time before the central bank is forced to shift their tone (trend seen in other G10 countries), given the upside surprise in growth and inflation figures. A move that should give the CAD some significant support.
The highlight of the trading day should the Chancellor Darling release of the pre-budget report. Overall, we don’t expect much, since a majority of the fiscal adjustment is not expected until late next year. In addition, UK trade balance should rebound after a dreadful September print and portray a more positive outlook for the UK trade position. Otherwise, we need to keep an eye on rates and equity markets. Despite the slight improvement of risk correlated trade, USD shorts have a heavy feel.