In a perverse reaction, the euro saw gains throughout the
day against many of its major peers in the wake of Standard & Poor’s ratings downgrade.

Despite having the quality of its debt reduced to just one
level above junk bond status, investors poured into the shared currency in
consistent fashion throughout the day’s trading. The rating agency’s actions
were viewed as a positive because it may promote greater urgency from Rajoy in
the Spanish bailout saga.

In a perverse reaction, the euro saw gains throughout the
day against many of its major peers in the wake of Standard & Poor’s ratings downgrade.

Despite having the quality of its debt reduced to just one
level above junk bond status, investors poured into the shared currency in
consistent fashion throughout the day’s trading. The rating agency’s actions
were viewed as a positive because it may promote greater urgency from Rajoy in
the Spanish bailout saga.

Many expected the downgrade to BBB- to have come before this
point, however the move may only have a real effect should Spain’s bond yields
creep back up.

In recent months investor risk appetite has been akin to a
light switch, either on, or off. Yesterday a ‘risk-on’ approach was evident as
investors left the dollar and yen safe havens in search of greater returns in
riskier assets. Amplified by encouraging US jobless claims data, which showed a
decrease to the lowest levels in 4 ½ years, the weakening dollar represents an
improved American domestic outlook, even in the face of the slowing global
growth.

We know that the markets yearn for a Spanish bailout, that
much is clear, therefore any steps closer towards the much-craved announcement
tend to result in euro strength. Today, euro strength may continue, however its
performance will likely be range bound as investors rationalise their bubbling optimism
that a bailout is nigh.

 

Key Announcements
Today:

• 10.00am – EUR – Industrial Production: expected contraction
  to -0.4%
• 13.30pm – USD – PPI m/m: expected growth of just 0.8%, previously
  at 1.7%
• 14.55pm – USD – Prelim Consumer Sentiment: expected similar
  to previous 78.3, at 78.1