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Spain’s credit rating downgraded

27 April 2012  •  Source: Richard Driver, CaxtonFX

Spain’s credit rating has been downgraded by two notches by S&P, who pointed to a challenging fiscal outlook – a major understatement. The euro understandably declined as a result and we are likely to see bond yields come back into focus as we move into the weekend.

The focus of today’s session is the US GDP for the first quarter of this year. An annualised growth rate of 2.6% is expected, which indicates just how far ahead the US recovery is compared to the eurozone and the UK.

STERLING/EURO: Sterling benefitted from yet more upside as eurozone debt concerns hit the headlines again.

• Spanish bond yields are on the rise again this morning, only marginally below the dangerous 6.0% mark, in response to Thursday’s Spanish debt downgrade. Contagion fears are likely to be fanned today then, with S&P stating that it expects Spain’s budget deficit to deteriorate worse than previously thought due to economic contraction.

• Sterling is trading only marginally below €1.23, which represents another fresh high for this pair. Sterling has performed excellently this week regardless of the ‘double-dip’ news.

STERLING/US DOLLAR: Sterling is coming under some pressure against the USD in risk averse trading conditions.

• The dollar found a little favour overnight as the Bank of Japan delivered another hefty dose of monetary easing, hurting demand for the Japanese yen. The US GDP figure is out this afternoon at 13:30 and the dollar’s inconsistent relationship with US data puts significant uncertainty over the likely market response.

• If the risk aversion theme holds today, then the dollar should firm up a little, but sterling will retain plenty of the demand it has enjoyed over the past two weeks, so don’t expect a major move lower. This pair trades at $1.6150.

EURO/US DOLLAR: This pair took a hit on the Spanish debt downgrade story but remains well within its range.

• The euro is trading half a cent lower on the worrying news that S&P has downgraded Spanish debt by another two notches. An Italian 10-year bond auction later today provides another short-term risk event for the euro, as well as the inevitable weekend eurozone political headlines.

• The euro is trading back down below $1.32 this morning and we may see another day of shaky trading for this pair.

STERLING/AUSTRALIAN DOLLAR: Sterling traded sideways yesterday as the aussie dollar proved quite resilient to the negative eurozone headlines.

• S&P’s downgrade of Spain hasn’t hurt the aussie dollar too much. The news of Japanese monetary stimulus is positive for the aussie dollar and so too will today’s US GDP number be, provided that it is positive. Still, it is hard to see the aussie dollar regaining much ground against the pound with the RBA poised to cut interest rates.

• Sterling is trading below the 1.56 mark this morning and we may see risk aversion take this pair slightly higher into the weekend.

STERLING/NEW ZEALAND DOLLAR: This pair posted fresh highs last night, helped by the RBNZ’s change in monetary policy outlook.

• The kiwi dollar found it tough yesterday as the market mulled over the RBNZ’s recent shift in policy bias from hawkish to neutral. Spain’s debt downgrade hurt Asian stocks last night as well, which weighed on the kiwi dollar.

• Sterling is trading above 1.99 this morning as this pair edges towards the psychological 2.00 level. Risks remain to the upside here.

STERLING/CANADIAN DOLLAR: Sterling bounced back against the loonie yesterday, helped by some poor US jobless figures.

• US weekly unemployment claims data was poor yesterday, which is the third week in a row we have been disappointed. This saw the loonie struggle a little yesterday but a strong GDP figure out of the US is likely to prove much more important.

• Sterling is trading half a cent higher at 1.5950 this morning and we may see the loonie go on the offensive again today.

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