S&P Threatens to Downgrade UK, Tankan Time

The Swiss franc was the top performer while the yen lagged. The Japanese Tankan survey and China PMI are highlights of Asia-Pacific trading. Both of last nights EURUSD longs are in progress, alongside GBPUSD, AUDUSD, USDJPY, EURJPY and US crude oil. See below for detail.

The pound was a laggard in US trading after S&P lowered its outlook on the UKs AAA-rating to negative. All three major ratings agencies now say they could cut its rating within the next two years if finances deteriorate more than expected.

Cable immediately dropped a half-cent after the headlines crossed but it later recouped a large part of the losses in an impressive show of resilience even as risk trades deteriorated. The S&P 500 fell 0.6%.

Economic data was mixed. US retail sales were slightly lower than expected at +0.3% but were virtually inline with estimates excluding autos, gas and building materials. Initial jobless claims were much better than forecast at 343K compared to 372K expected.

The focus on Friday will be politics as fiscal cliff negotiations, Italian political drama and the Japanese election take centre stage. All other things equal, it would not be a surprise to see yen crosses pare recent gains ahead of the weekly close due to election uncertainty.

Asia-Pacific trading has some top tier indicators to close out the week beginning with the Japanese Tankan manufacturing survey at 2350 GMT. The large manufacturing index is expected to fall to -9 from -3 as the outlook deteriorates.

At 0145 GMT, the focus shifts to China with the December manufacturing PMI from HSBC. There is no consensus but this is an important index that stood at 50.50 in November.

The focus shifts back to Japan at 0430 GMT for industrial production. The consensus is for no change to the +1.8% m/m preliminary reading.

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