EUR/USD Oct. 17 Climbing as Spain Avoids Moody’s Downgrade

EUR/USD continued its impressive rally,  punching  past the 1.31 line. The markets reacted positively to the decision by the Moody’s credit agency not to downgrade Spain’s credit rating. After the announcement, the euro  moved upwards and Spanish bond prices fell. European leaders will gather at the European Economic Summit in Brussels on Thursday and Friday. The debt crisis in Spain and Greece will top the agenda, and the leaders are also expected to discuss steps for closer integration of the Euro-zone. It’s a quiet day, as there are no scheduled European releases. Today’s economic highlight is US Building Permits.

Here’s an update about technical lines, fundamental indicators and sentiment regarding EUR/USD.

EUR/USD Technical

• Asian session: Euro/dollar was steady, trading around 1.3090. The pair has crossed above 1.31 in the European session.
• Current range: 1.3105 to 1.3170.

Further levels in both directions:    

• Below: 1.3060, 1.30, 1.2960, 1.29, 1.2814, 1.2750, 1.2670, 1.2624 and 1.2587.
• Above: 1.3105, 1.3170, 1.3290, 1.34, 1.3437 and 1.3480.
• 1.3105 is  providing weak support  as the pair continues to rally. 1.3170 is stronger.
• 1.3060 is the next  line on the downside.

Euro/dollar higher as Moody’s maintains Spanish credit rating- click on the graph to enlarge.

EUR/USD Fundamentals

• 12:30 US Building Permits. Exp. 0.81M.
• 12:30 US Housing Starts. Exp. 0.77M.
• 14:30 US Crude Oil Inventories. Exp. 1.4M.

EUR/USD Sentiment

• Moody’s maintains Spanish rating:  There was positive news  for the markets as  Moody’s  maintained Spain’s credit rating at Baaa3 with a negative outlook. Although the grade is just one notch above junk status, the move came as a surprise, as  many analysts  were expecting a downgrade. The announcement kept the euro rally alive, and 10-year Spanish bond rates dropped to 5.57%, a six-month low. Despite the initial  market enthusiasm, Moody’s decision could actually  result in  further market uncertainty and  instability, if Spain  elects  not to request aid until November.
• Expectations low for EU Economic Summit:  By now, investors have (hopefully)  learned to  keep their expectations at a minimum  when it comes to EU Summits. The upcoming meeting this week in Brussels will be the fourth this year and these grandiose meetings generally do not lead to any dramatic breakthroughs.  Greece and Spain will, of course  take center stage, as  the EU grapples with  the  crippling debt crisis  engulfing both countries. In addition, the  27  European leaders will discuss plans to further integrate the Euro-zone. Germany is  interested in  overhauling the present system and creating a new “super commissioner” who would be  responsible for fiscal policy, but  it’s an open question how much support  is out  there for this initiative.
• Spanish bailout a go?: Speculation continues that Spain  may request aid at Thursday’s EU Summit, despite the denials out of Madrid. According to one possible scenario, the request will only be for a credit line, rather than a full bailout. This would satisfy a requirement for the ECB’s OMT bond buying program.   Germany seems to be in agreement with this idea, since it doesn’t require borrowing funds from the ESM.   This credit line, actual titled the Enhanced Conditions Credit Line, was introduced yesterday as a new part of the ESM.  Italian Finance Minister Vittorio Grilli noted that a 100 billion euro aid request from Spain would shave 1.5 percent off Italy’s economic output. Although Grilli was quick to add that Italy had to be “generous”, clearly he is no supporter of the bailout. The high-stakes posturing between Spain and the EU makes for a most interesting background, just before the EU Economic Summit.
• Greece  talks continue:  Greek PM Antonis Samaras  seems to have changed his tune, after declaring earlier in the week  that the Greek government and its international lenders would reach a deal on the country’s mountain of debt before a meeting of EU leaders on October 18. Samaras is now saying the talks will not wrap up before the Summit. Greece has been  meeting with the European Union, European Central Bank and International Monetary Fund on a new set of spending cuts and economic reforms in exchange for the next installment of bailout funds, worth 31.5 billion euros. The talks have dragged on for months, and Greece claims it will run out of funds in November if it doesn’t receive the funds. If a deal is signed, it would bring some much-needed stability to the markets and to the Euro-zone.
• Strong  Chinese data improves risk sentiment: The markets got some good news from China, as the country’s trade surplus widened in September, and exports jumped 10% compared to the same period last year. Strong Chinese readings could mean an improving global economy, which is bullish for currencies such as the euro, as investors are willing to take on more risk and move away from the safe-haven dollar. On the downside, the dispute between China and Japan over some contested islands continues, and trade is down between the two Asian giants. For example, Japanese auto sales to China have dropped between 35-50% in recent months.
• Recession worries rise  in Euro-zone: Spain and Greece are in the daily headlines these days, but other zone countries have serious problems as well. In France, GDP has dropped for three straight quarters, PMIs are down, and the Hollande government has introduced unpopular austerity measures. Italy is also struggling, with a contracting economy, rising bond yields, and weak retail sales and industrial production numbers. Germany is in better shape, but the once invincible locomotive of Europe has slowed down and has some glaring weaknesses, such as business sentiment and manufacturing.