EURUSD – Moody’s cuts Spanish rating

In yesterday’s snapshot we suggested that while market is overpricing a possibility of multiple hikes this year in the euro zone, it is – at the same time – underestimating a downside related with the debt crisis. That downside didn’t let us waiting for too long – Moody’s slashed Spanish rating to Aa2 neg (similar to S&P, one notch lower than Fitch) on high potential costs of help to the banking sector (sounds familiar?) and insufficient progress with fiscal reforms. The cut takes place just one day ahead of the summit which is suppose to deliver some long-term solutions for ailing countries within the zone. The cut might intensify pressure on Portugal to accept an aid to prevent a turmoil in Spain.

In yesterday’s comment we also pointed at a possibility of the latest ECB meeting to be a turning point for the EURUSD. That looks even more probable now. Technically, the pair is just testing the key trend line (around 1,38, the first defense was successful) – moving lower could signal a major decline with a target even at 1,3430.

AUDNZD – RBNZ slashes rates, employment decreases in Australia

The RBNZ cut interest rates by a surprising 50 bps, exceeding market expectations of a milder cut of 25 bps. The move was a response to a negative shock served by another earthquake in New Zealand which might further undermine a recovery which was nevertheless substantially weaker than in Australia.

Even though that looks like extremely bearish for NZD, actually we might be looking at some reversal on the AUDUSD. NZD already felt the impact of lackluster economy and the earthquake, consequently losing against AUD and actually being the weakest currency among majors and second-tiers in February (by far). Even if perspectives for the economy of New Zealand aren’t bright, the downside might be limited for NZD, but not necessarily for the AUD. Australian employment fell by 10k in February – for the first time in 18 months. Australian economy is hitting the brakes and a possible correction on industrial commodities means that an outlook for the Aussie isn’t rosy at all. Therefore, at least some correction on AUDNZD is very likely, especially if supports at 1,36, 1,3517 and 1,3450 are broken.  

Events to watch – claims, BoE, Chinese data

On top of intangibles like euro debt issues and Libya-oil prices – equity prices circle, Thursday brings couple of important releases and events. Even though EURUSD is mostly shaped by what’s going on in Europe at the moment (ECB and PIIGS), another solid reading of the US initial claims (8.30 ET, 14.30 CET, consensus 380k) might provide some extra fuel for the bears on this pair. For the GBP minutes (showing change in views) are key at the moment but the BoE decision (7.00 ET, 13.00 CET, no change expected) will still provide an opportunity for investors to express their views on the pound. In Asia investors will be focused on the Chinese data (9.00 PM ET, 3.00 CET), especially inflation (consensus for CPI is at 4,7%, PPI at 6,9%). A high reading in this case might be decisive for industrial commodities like copper facing the largest correction in months.   

Przemysław Kwiecień PhD, Chief Economist

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