Sentiment Higher Despite Spain Downgrade

The dollar is trading softer again today as sentiment is higher despite S&P’s downgrade of Spain. The ratings agency cut Spain’s rating to BBB-, just above junk status. The euro is higher as the rating action now brings S&P in line with Moody’s rating which is just above junk status.

Moody’s is due to complete its review of Spain this month and a potential cut to junk would have negative implications. Some market participants view the reduced rating from S&P as adding pressure on Rajoy to request aid sooner rather than later which would activate the ECB’s OMT program which may provide near-term support to the common currency.

Elsewhere in Europe, Italy sold €6B in bonds at yields that were slightly higher than previous auctions. Sovereign yields1are lower across Europe with the exception of Spain which is seeing its yields edge higher. CPI figures were released in France and Germany with inflation coming out in line with expectations in Germany at 2.0% y/y while France’s CPI unexpectedly slowed to 1.9% from the prior 2.1% (cons. 2.2%). EUR/USD rebounded ahead of the pivotal 200-day simple moving average (SMA) once again and is currently trading around session highs of nearly 1.2940. The 21-day SMA comes in at about 1.2960 as immediate resistance ahead of the 1.30 big figure.

AUD higher after gains in employment
The AUD is higher after Australia’s September employment report showed a gain of +14.5K jobs (+32.1K full-time, -17.7K part-time) which was more than the consensus expectations of +5.0K. The unemployment rate jumped to 5.4% from 5.1% as the participation rate rose to 65.2%. The aussie is firmer against most of the majors following the report as markets re-price expectations of another RBA rate cut. AUD/USD is trading back above the 100-day SMA and faces the next key upside pivot around the 200-day SMA which comes in at about 1.0340/45.

JPY underperforms
The Japanese yen is underperforming today amid increased risk appetite and after negative economic data out of Japan. As we have noted, JPY has been driven more by broader sentiment while domestic fundamentals have had less of an impact in the exchange rate. Machine orders in August tumbled by -6.1% (cons. -4.6%, prior +1.7%) which adds to evidence that Japanese economic activity may be falling back into contraction.

BOJ minutes were also released overnight and indicated that one member supported purchases of risk assets and a member said more influence on the FX rate is needed. The minutes also showed that the global economy faces high uncertainty, a view that was echoed by Governor Shirakawa who said today that the global economy is very unstable. The yen is weaker against all of its G10 counter parts and USD/JPY is approaching key resistance around the 100-day SMA while CAD/JPY trades back above its 100-week SMA.

In the US, weekly initial jobless claims fell by 30K to 339K (cons. 370K), the lowest level in over 4-years. However, the labor department said that “one state accounted for most of the decline in claims” which means that the number may not accurately reflect the overall condition of the labor market. August US trade balance figures showed the deficit widening to -44.2B from the prior -42.5B while Canada’s trade deficit narrowed to -1.32B from -2.53B.
Fed speakers due later today include Raskin (FOMC voter), Plosser (non-voter), and Bullard (non-voter).


Reference is for informational purposes only and is not offered to US clients.

Fig 1: US weekly initial claims fall to a 4-year low, but one state accounted for most of the decline
Source: Bloomberg

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