Home Another Shoe Dropped in Spain

The sound you hear is the other shoe dropping in Spain today.  Late last night Standard and Poor’s cut Spain’s debt rating to one level above junk.  The reasons given were growing economic and political risks, with the Spanish government considering a second bailout.  The debt rating for the country was lowered two notches to BBB- from BBB+.  S&P also assigned a negative outlook to the nation’s long term rating and lower the short term sovereign level to A-3 from A-2.

According to the rating agency, lowering the outlook, “reflects our view of the significant risks to Spain’s economic growth and budgetary performance, and the lack of a clear direction in eurozone policy”.  It added, “the deepening economic recession is limiting the Spanish government’s policy options”.

“The capacity of Spain’s political institutions (both domestic and multilateral) to deal with the severe challenges posed by the current economic and financial crisis is declining”.  Adding to Spain’s woes, Moody’s. which had put Spain at Baa3, is expected to follow the S&P downgrade soon.

Following the announcement, the EUR moved lower and tested support at 1.2825.  The EUR has rallied over the last few hours.  Most of the selling overnight has come from leveraged funds managers, especially after the Spanish downgrade and the moves higher have been due to short positions getting “squeezed” out.  Market participants are indicating that there are stop loss orders building above the 1.2900 level.

Having sold off to the 1.2825 level, technical indicators are beginning to turn negative. Rallies in the currency will probably be less potent moving forward, and the next anticipated target would be the 1.2760-65 area.

Yesterday’s release of the Beige Book survey showed that the US economy has “expanded modestly”, which was different from the August report when it was reported that the US economy “expanded gradually”.  Most of the FED districts surveyed showed modest growth while the New York District “leveled off” in economic activity and the Kansas CIty district showed “some slowing” in the pace of growth.  Overall there was improvement in the housing market and the automobile sector.  Consumption was mostly flat, while manufacturing was slightly improved.  The report backed comments made earlier by FED Chairman Bernanke that the current pace of economic growth is not sufficient enough to bring employment conditions back to normal.

In other currency news, the Aussie Dollar rose on stronger than expected employment news. The Australian job market grew by 14,500 in September, which was far better than the consensus of 5,100.  The unemployment rate did rise more than expected to 5.4%. According to analysts, while the labor market has remained resilient, it hasn’t reduced the odds of further rate cuts from the RBA.  The AUD has tested the 1.0300 level, but has yet to break through.

The Canadian Dollar has tested the .9785 support level ahead of the release of Canadian trade balance figures later this morning.  A break of the .9785 support level would target the .9750 area.

Matthew Lifson

Matthew Lifson

Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.