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Foreign Exchange

JPY, GBP and rating agencies: Relative devalue trading

The vague concept that FX has moved into an era of relative devalue trading became more of a solid reality this week.

On Monday, Moody’s downgraded Japan’s foreign currency debt to Aa2 and on Thursday S&P lowered its outlook on UK debt to negative. Both events triggered a knee-jerk market reaction – perhaps more so in GBP, which had spent most of the week very much in favour.

Next month’s Euromoney magazine contains a short article about why the JPY looks like it could be moving centre stage in FX, even when there is not that much going on. After the sell off, the JPY soon became range bound against several other currencies again. What may prove significant is that Moody’s upgraded Japan’s local currency debt to Aa2, a move Naomi Fink, Japan strategist at Bank of Tokyo Mitsubishi UFJ, described as a unification. Overall, she said that Japan-watchers were left nonplussed.

A similar view was expressed by a senior salesman in London after the S&P move. “I don’t think anyone cares what these agencies think. These are the guys who rated rebundled packages of crap as triple-A. They’ve got no credibility,” he pointed out after the GBP leant into the battering it temporarily received in the market. His nonchalance appeared fully justified when just a short time after S&P had published its announcement the UK’s Debt Management Office managed to sell a record £5 billion of gilts.

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