Italy has not been doing well, next to Spain they are the biggest thorn in the European’s economy’s side. The area has been struggling for some time now, and their bonds have surpassed the ‘point of no return’ 7% yield. In addition to this, the manufacturing and job market is substandard. So, it is no surprise that Italy has its credit rating cut by a staggering 2 notches by Moody- the bond rating business of Moody’s Corporation. This move also triggered a further fall of the euro, which is less of a surprise than the downgrade itself. The euro now continues of the downward path, surpassing the previous two year low against the U.S. dollar after the downgrade on Friday. The Italian downgrade is only a piece of the puzzle contributing to the fallen euro, as the euro has been suffering over the last thirty days.
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Despite the downgrade, Italy managed to auction three-year
debt at lower borrowing costs, helping the euro hold
steady on the day at $1.2187.
That meant the single currency stayed within sight of a
two-year trough of $1.2166 hit on trading platform EBS the
previous day and was on track for its second straight week of
losses. It fell to $1.2181 in the Asian session after Moody’s
two-notch rating cut.
Moody’s warned it could further cut the new Baa2 rating,
which stands just two notches above junk, if Italy’s access to
debt markets dried up.
“The auction was not too bad but the bigger news is the
double notch downgrade,” said Derek Halpenny, European head of
FX research at Bank of Tokyo Mitsubishi.
“Disappointing economic growth, coupled with fragile
investor confidence and high peripheral yields remain ahead for
the rest of the year. Our target is for the euro to drift to
$1.15 in three to six months time.”
Near-term support for the euro is expected around $1.2151,
the June 29, 2010 low, with another support level around $1.1876
a low struck on June 7, 2010.
There was some talk of an option barrier in the euro at
$1.2150. That suggests options players would bid for the euro if
it drops close to that level, offering the single currency some
support.
The euro has shed 5.7 percent so far this year, already
exceeding the losses it chalked up in 2011, with declines
accelerating after last week’s deposit and refinance rate cuts
by the European Central Bank (ECB).
The unprecedented cut to zero in the deposit rate means
banks will earn nothing for parking excess funds with the ECB,
and it will encourage investors to sell the low-yielding euro
and buy higher-yielding riskier currencies.
Analysts said this left the euro vulnerable in times of both
improving and deteriorating market sentiment.
Many market players said the euro’s steady drift lower meant
it could rebound in coming weeks if thin summer liquidity led to
volatile trading conditions, but its outlook remained weak.
“While there is a risk of a short squeeze that could push
the euro higher, we expect more selling into a bounce. We also
expect the ECB to lower rates and launch unconventional measures
in coming months, all of which will keep the euro under
pressure,” said Beat Siegenthaler, currency strategist at UBS.
The single currency also dropped to a four-month low against
the Norwegian crown of 7.4325 crowns, and a record
low against the Canadian dollar of C$1.2386.
CHINESE GROWTH
While the euro hovered near two-year lows against the U.S.
dollar, the Australian dollar rose 0 .3 percent to $1.0166
, boosted by data showing that China’s economy grew 7.6
percent in the second quarter from a year earlier.
China’s economic health is always a key driver for Australia
because the Asian powerhouse is Australia’s single largest
export market.
Though the lowest reading in three years, it was exactly in
line with expectations and came as a relief to investors, who
had been worried about the risks of a weaker result especially
at a time when activity in the U.S. and Europe is slowing.
The safe-haven dollar held near a two-year peak hit against
a basket of major currencies the previous day. The dollar index
stood at 83.650, having climbed to 83.829 on Thursday,
the highest level since July 2010.
Against the yen, the dollar held steady at 79.29 yen.
After Moody’s downgrade of the Italian credit rating by 2 notches, the euro took a dive against the U.S. dollar. The downgrade of Italy’s credit rating only added to the euro zone debt crisis, but was hardly an unexpected move. Even with the downgrade, Italy did auction their three year debt at lower costs- which helps the euro hold a little steadier than one would expect. The rating could be cut even further, Moody warned, and the Italian credit rating only stands 2 notches from junk bond status.
Commodity currencies did well in other areas as growth figures out of China met expectations. Against this news, the Aussie dollar grew because China’s economic health is always a key driver for Australia because the Asian powerhouse is Australia’s single largest export market.
The U.S. dollar held steady against foreign currency, a stark contrast to the position it was in two weeks ago after a report of weakened economic growth.
Do you think this upcoming week will change the position of the euro?
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