A seemingly better payrolls number temporarily boosted both the euro and risk appetite on Friday, but all gains were lost after a salvo of Eurozone sovereign rating actions hit the newswires after the London close. Fitch finally cut Italy and Spain, and warned that Portugal's rating was still under review, and that a verdict would be announced before year-end. Moody's put Belgium's rating on review for a possible downgrade citing − amongst other factors − the negative impact bank recapitalisations might have on the public finances. This illustrates that while the recapitalisation effort is seen as broadly, yet temporary in my view, euro-positive, it is not exclusively so and may have some unintended euro-negative consequences. German Chancellor Merkel and French President Sarkozy gave a joint press conference on Oct 9 which was light on detail. However, they did set themselves the task of agreeing by the end of October a more specific plan to stabilise the Eurozone. However, they can establish plans as they wish, but the power of the market's will prevail and the CB's will be left scrambling for answers to save short term impact of such unintended consequences.

Previously, mid-November had been informally seen as a deadline, but deadlines will likely be reset based on new unforeseen circumstances. I have been saying in Pro Traders Club (at 1.4300) that the highest probability fx position with a multi year timeframe lies in a short EUR position against a basket. EURUSD should see levels below 1.1500 in the years to come. We have clients positioned for such levels. Hey, it's better than the interest you're getting at your bank! On Sunday, German Chancellor Merkel and French President Sarkozy gave a joint press conference in Berlin. They said their ambition is to agree a plan for stabilising the Eurozone by the end of October. However, they explicitly declined to reveal the details of what that plan might look like. Merkel said that the steps to improve economic coordination within the Eurozone will require Treaty changes. Both agreed to keep Greece inside the Eurozone, and to defend the euro "with all our strength". How much strength will they need to fight the markets as peripheral economies find it necessary to revert to their own currency to save their economies? They were vague too on the subject of bank recapitalization, saying only that they intend to defend Eurozone banks, and that they were in 'total' agreement on the matter.

Thomsen, the IMF's Mission Chief in Greece, said Greece is "at a crossroads" and that the program "will not work if the authorities do not take the path that requires much stricter structural reforms than those that we have seen so far." He noted too that "political and social fatigue is growing." Indeed, how long will it take before the German and French public begin to resist having their tax dollars save the negligent?

Greece's representative at the IMF, Panagiotis Roumeliotis, said that Greece would need more funding than that already envisaged under the second proposed rescue of Greece agreed on July 21. He said either the EUR 109 bn proposed rescue would have to be increased, or the financing gap would have to be closed "through a restructuring of private debt". He said the IMF favoured the latter option. EUR 109B...? Gee Wizz! 4B will come from some inconsequential austerity..? Maybe, if you can convince the folk who retired at 50 to go back to work and retire at 65!

Belgian Finance Minister Reynders indicated that imposing additional austerity measures on Greece could become counter-productive. He said at some point the strategy must stop given "we do not want the cure to kill Greece". Forget Greece, there will be bigger farmed fish to fry.

The euro endured a double-dose of downside towards the end of the US session on Oct 7. Fitch first downgraded Italy one notch to A+, outlook negative. This amounted to a partial catch-up to Moody's and S&P - both of which rate Italy one notch lower still. Ten minutes later Fitch downgraded Spain 2 notches to AA-, outlook negative and instantly Fitch became the rating agency with the most pessimistic rating on Spain (Moody's and S&P both rate Spain one notch higher). The euro fell sharply on the second headline, closing over 100 pips lower, but we'll add some 00's in the months to come.

Just before the close on Friday Moody's put Belgium's Aa1 rating on review for a possible downgrade. This warning is significant given that Belgium has not experienced a ratings downgrade since 1998. By way of rationale, Moody's invoked similar reasoning to that used in its three-notch downgrade of Italy earlier in the week, but also pointed to the strains on the sovereign balance sheet that could flow from bank recapitalisation needs. Is a downgrade or a rating just a statement to show the world that the rating agencies show up at work each day?

Fitch announced it is maintaining its rating watch negative on Portugal which it first applied on April 1. It said it aims to decide on the rating before year end. Fitch currently rates Portugal one notch above 'junk' at BBB-.

The BoE surprised Thursday by announcing a GBP75bn QE2 programme; markets had been looking for only GBP50 bn, and not until November. By announcing a bigger package earlier, the BoE has adopted something of a 'shock and awe' policy as it did with QE1. The QE programme will exclusively involve the purchase of Gilts with maturity of three years and beyond, starting as early as next week. It could well be followed by a further expansion in February if Eurozone woes continue. Pro Traders Club members can view the video of the live GBPUSD short trade taken prior to the news release and the subsequent fall... and the thought process behind buying GBPUSD at the base of the move before price returned to the pre-release levels.
On Sunday, Bank of England MPC member Weale indicated that he supported Thursday's decision to embark on another round of QE (the full voting breakdown will not be known until the minutes are released on Oct 19). This marks quite a turnaround in thinking given Weale had, until recently, cast his vote in favour of rate hikes, only dropping his call for this at the August meeting. Like Governor King on Thursday, Weale also raised the possibility that further rounds of QE could follow - he said "there is quite a lot of scope for further quantitative easing" noting that the stock of issued Gilts was greater now than it had been when the Bank first embarked on QE in March 2009.

Source: UBS, Reuters, Chris Lori