FX open: Euro shrugs off rating cuts

By Francisco Miñana

Date: Thursday 14 Jun 2012

It is no surprise that the Spanish equity market is among the worst performers on the European mainland in early trading on Thursday after Moody’s downgraded Spain by three notches.

The main European equity benchmark indices opened on Thursday with an average loss of 0.10%, but Spain's Ibex35 was hit harder.

Spain’s risk premium is at 539 basis points with a 10-year bond yield of 6.86%. Germany’s 10-year bund still has a low yield of 1.47%.

The periphery sovereign debt crisis continues its course in spite of the bailout of the Spanish banking sector. Today, The Financial Times reports that France may be pressuring European partners to adopt a set of measures to obtain financial stability. France is proposing granting the European Central Bank the authorization to supervise banks across the Eurozone and for the European Stability Mechanism (ESM) to be allowed to recapitalize banks directly. Germany has been opposing the measures, especially those related to the ESM.

Moody's also downgraded Cyprus as that country may soon be requiring a hand-out.

In the foreign exchange market, the euro is rising versus the majors in spite of the latest rating cuts. The euro/dollar stopped short of 1.2600 but remains above 1.2570. The euro/yen approaches 100 again and the euro/sterling pound is back above 0.8100. We will remain alert to the Swiss franc after the Swiss National Bank kept its key rate at 0.00%. The pound shows some weakness versus the dollar and the yen. Nordic currencies are easing back from earlier strength and carry trade currencies rise versus the greenback and the yen. Kiwi strength stands out after the Reserve Bank of New Zealand kept its own key rate at 2.5%. The central bank pointed to strong internal demand.

On the macroeconomic front, industrial production in Japan fell slightly from preliminary estimates. In Australia, inflation expectations fell to 2.3% in June from the previous 3.1%. Coming up, there will be consumer price index (CPI) data and labour costs in the Eurozone. There will be weekly unemployment claims, CPI, and current account data in the United States.

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