Morning Currency Wrap for Friday January 28, 2011

Moody's Warns It May Have To Revise US Credit Rating  - U.S. Q4 GDP increased at an annualized rate of 3.2%, which is not as strong as the 3.7% increase that had been expected, but was still better than the 2.6% annualized rate that had been recorded in Q3. Personal consumption increased 4.4% in Q4, up from 2.4% in Q3. The market is taking this in stride but it is being overshadowed by Mood's Investors Service warning that it may need to place a “negative” outlook on the U.S. debt rating sooner than anticipated. I guess this should have been expected after yesterday's downgrade of Japan by Standard & Poor. These two developments makes you question the safe haven appeal of the Yen and USD. Maybe the market will start moving to other safe haven such as Gold, CHF, CAD, NOK, and the Chinese Yuan. Elsewhere, the GBP weakened across the board after consumer confidence dropped the most in almost two decades in January after an increase in sales tax reduced spending power, thereby fanning speculation that the Bank of England may not be able to raise interest rates to fight inflation as growth slows. Also in Europe, the SEK weakened across the board on news that retail sales only rose by 0.1% in October. In Asia, the USD trimmed its losses against the Yen after the release of Q4 U.S. GDP. The Yen did recover some of yesterday's losses after the rating downgrade as investors reasoned that the move could hasten fiscal reform in Japan. Keep in mind that market players are instead positioning for Yen weakness in the options market. In Canada, the CAD was slightly down but remain in a tight trading range versus the USD after the U.S. GDP came in slightly weaker than expected. The CAD also received positive comments by Canadian Finance Minister Jim Flaherty. Flaherty said that the CAD is likely to prove resilient on the back of relatively strong commodity prices and healthy public finances. "We're not going back to the old days, the CAD (at) 65 cents, 75 cents, that led to some inefficiencies in business,"Flaherty told Reuters Insider TV on the sidelines of the World Economic Forum in Davos. "The fiscal fundamentals of the country are strong, commodity prices for the most part, including agriculture prices are relatively strong, so there are good reasons for the CAD to have some resilience."