Moody’s Could Dampen the Mood for Spain

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The EUR remained bid overnight as the USD weakened as “risk sentiment” came to the forefront after the release of the Spanish budget.  Positive feelings over the budget helped move the Spanish 10 year yield back below the 6% level.  According to officials, the budget is “a crisis budget aimed at emerging from the crisis”.  

EU commissioner Rehn gave credit to the budget saying “the reforms are clearly targeted at some of the most pressing policy challenges”.  There are some skeptics, as usual, who are concerned that this plan is focused on spending cuts rather than in increasing revenues.  The decision over sovereign bailout also remains unanswered as we get to the end of the week.

The willingness of Spain to show compromise in their budget has helped the EUR but that euphoria could be short lived.  As we come to the end of the month, Moody’s is expected to make a decision concerning the sovereign rating of Spain.  The slightest downgrade of Spain would be enough to put Spain’s rating into junk territory.  Adding to the Spanish news day, bank stress tests are due to be released today.  As far as the Moody’s announcement is concerned, there is no indication as to what time this news will be released. The ratings agency stated on June 13, when it downgraded Spain 3 levels that is was waiting for the outcome of the audit of Spanish banks, so with that completed the news may come at any time.

While some analysts are concerned that a negative response from Moody’s could dampen the EUR rise, others note that the EFSF has already agreed to provide as much as EUR 100 billion in funds, which will be used for recapitalization.  When Spain releases their capital shortfall it is expected to only be around EUR 60 billion, which is well within the range of EFSF tolerance.

EUR has found some good buyers at the 1.2900 level and resistance comes into play at 1.2950, then 1.2970.

The Greek coalition government has agreed to a plan to cut spending over the next few years by EUR 11.5 billion.  This agreement gives a base for “stronger negotiation” with international creditors for easing conditions on fiscal reforms.  Greece is still waiting to receive the next tranche of bailout funds from the EU and IMF.  The Greek PM is still attempting to gain a two year extension on fiscal reforms.  The next meeting with the troika is next Monday, October 1.

The CAD and AUD have also found support and moved higher as “risk on” trades seem to be the order of the day.  The commodity currencies  are testing their overnight highs as AUD rose to 1.0470 and the USD/CAD has fallen though the .9800 level testing .9780.  Technicals are showing a slight bias towards a lower USD/CAD is  the currency pair can crack the .9780 support level.

I would expect to see the EUR remain above the 1.2900 level as the week closes.  The only problem that could arise would be something released by Moody’s that could upset the market. Asian and European equity markets are mostly higher this morning, reacting to the Spain budget release.  DOW Futures have bounced around par overnight so I’d expect a quiet start to the US equity trading day.

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

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