The shock downgrade of New Zealand's credit rating by Fitch not only made the number of countries with a triple-A rating one smaller today, but it also came as a rude reminder to the markets that economic strife is not wholly limited to the Eurozone. Greece's woes and in turn Europe's dreadfully disjointed attempts to address the crisis have hogged the spotlight and the media pages for most of the past few weeks, leaving the discussion of risks elsewhere sorely neglected. The impact on New Zealand's currency has been relatively limited taking into consideration the moves in most commodities currencies this morning, and indeed the country's headline equity index, the NZX 50, has actually posted strong gains today of 1.3%. However, the lingering effect of Fitch's action today is less likely to be on New Zealand specifically, but more generally a nervous awareness of how fragile the global economy is at present, and how the Greek crisis is not simply the sick part of an otherwise healthy whole system.   Undoubtedly, markets will still spend much of today speculating on the discussions between French President Sarkozy and Greek PM Papandreou, in spite of the fact that very little actionable progress is likely to be made in the absence of other Eurozone member heads to approve new measures. Adding to the acute headline risk surrounding these talks, today is not only month-end, but also quarter-end; meaning that large fixing related flows may make price action unpredictable and volatile - especially heading into the afternoon session.   One interesting comment to emerge over the last 24 hours was the suggestion from an SNB official that the central bank would start to diversify its foreign exchange reserves into sterling about a year from now. With the SNB already holding a significant accumulation euros and resolutely committed to maintaining a floor on EURCHF (which logically involves buying more euros), it makes sense that the bank is looking to diversify. The natural consequence of such action would be downward pressure on EURGBP, and perhaps some other euro crosses. In understanding why the SNB would choose to buy pounds rather than any other options, it is worth underlining one important thing that the UK has going for it that most of the other majors do not; that being political stability. Glancing at the familiar heads of key European nations, most - including Merkel and Sarkozy - face elections in the coming months that threaten to disrupt critically sensitive and acutely necessary reforms. Across the Atlantic, the next US presidential nominees are already embroiled in campaign battle and no doubt one of the earliest points of business for the new administration will be the contentious US debt ceiling debate. In contrast, David Cameron's coalition government came into power less than 18 months ago and barring an upset, is only required to call another general election by May 2015. Given the current state of European distress and government unpopularity during these austere times, having the luxury of such time now looks like an enviable asset.
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