The latest news that S&P lowered Italy’s credit-rating outlook has pushed the Euro below 1.40 for the first time in over two months.
Lowering Italy’s credit-rating outlook from stable to negative, the S&P cited the nation’s slowing economic growth and “diminished” prospects for a reduction of government debt as the main reason. The last time it actually cut Italy’s credit rating was in 2006.
In danger of losing its A+ credit rating, Italy’s Treasury immediately responded after the announcement, saying that it would “intensify structural changes and push ahead with measures to balance the budget by 2014.”
After the news subsided, the extra yield that investors demanded to hold Italian 10-year bonds over German bunds rose 13 basis points to 185, the highest in more than four months.
In good company, bond yields in the other debt-laden PIGS (Portugal, Ireland, Greece, Spain) fared badly as well:
1. Portugal: 10-year yields jumped 25 basis points to 9.16%
2. Ireland: 10-year yields jumped 9 basis points to 10.32%
3. Greece: 10-year bond yields jumped 57 basis points on Friday to 16.37%
4. Spain: 2-year yields jumped 29 basis points 3.62%
All were record-highs, except for Spain, which recorded the high since early January 2011.
It was a “double-whammy” for Greece because another ratings agency, Fitch, cut its long-term debt rating to B+ last Friday, four notches below investment grade, and placed it on rating watch negative.
The biggest beneficiary out of all this mayhem has been the US dollar. For the month of May thus far, it has risen against all 16 of its most- traded counterparts.
“The chance of a further bounce in the dollar is quite strong,” said Ken Dickson, investment director of currencies in Edinburgh at Standard Life Investments, which oversees $250 billion.
Early this month, it seemed that nothing could stop the Euro charging its way up. On 4th May 2011, EUR/USD touched 1.4939, a 16-month high.
All that has remarkable changed in the span of three short weeks. Now it seems that the Euro can’t seem to put a foot right.
The sovereign-debt problems did seem to fade in the background just a few months back, with QE2 in the US and high inflation in Asia hogging the limelight. Now the spotlight is firmly on the Euro again.
According to the median estimate of at least 29 analysts surveyed by Bloomberg News, the sovereign-debt problems in Europe will limit the region’s economy to less than 2% growth this year and 1.6% in 2012.
Top News This Week
German Prelim CPI. Friday, 27th May 2011, 2am. I expect a figure of 0 percent (previous figure was 0.2 percent).
Trade Call
Sell EUR/USD at 1.4060
In a repeat of last week’s trade, we will short the EUR/USD. On the hourly chart, we see that the EUR/USD has broken the support level at 1.4064. Additionally, at the time of this writing, the hourly candle has closed below the psychological number of 1.40. This is a clue to further downside.
We will go short once prices retrace close to the support level. Entry is 5 pips below the support level. Stop loss is placed 75 pips above the entry price and we will have one profit target on this trade.
Entry Price = 1.4060
Stop Loss = 1.4135
Profit Target = 1.3985
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