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Despite elevated levels of event risk this week and some mixed economic data the euro continues its march higher as the markets focus squarely on Spain. A weak-ish German ZEW survey that points to German growth slowing from 1% in Q2 to approx. 0% in Q3 is like water off a duck’s back, the jump higher to 1.31 was fuelled by Moody’s, the credit rating agency, who affirmed Spain’s credit rating at Baa3 with a negative outlook. The markets had expected a downgrade to junk status so the 50 pip jump in EURUSD is a relief rally. 1.3175 – the high from last month – is now key resistance.

Moody’s to Spain: Apply for a credit line

Moody’s said that Spain was saved from being downgraded to junk status because of a few positive developments since June including the ECB’s willingness to buy Spanish debt with its OMT programme. Moody’s said it expects Spain to apply for a precautionary line of credit from the ESM which would then trigger OMT purchases of Spanish debt in the secondary market and prop up demand at sovereign auctions. Moody’s does not expect Spain to request a bailout and expects it to retain full access to private capital markets. To us this means that if Spain does not request a line of credit in the near term it still may be downgraded.

We would argue that Spain is not safely out of the way of another rating downgrade in the coming months. Moody’s said that the negative outlook applied to Spain’s rating was because of downside risks to its “base line scenario”. Thus Spain may not remain above junk status for long as the risk of missing its fiscal targets for this year is high in our opinion. The budget deficit has continued to get worse this year, and in August it widened to EU50.13bn, the September data will be released at the end of this month and it will be an important data point as any further fiscal slippage could cause Spain to miss its deficit target for this year, which may trigger further rating downgrades in the medium term.

Spain triggers a broad based rally in risk

Spain’s near miss with a junk credit rating has boosted not just the euro but also the Aussie and the Kiwi, which suggests “positive” Spanish news is causing a broad-based risk rally. The pound is weaker along with the USD and the yen. European stocks have had their third positive daily start in a row and any sign that Spain is about to apply for a preliminary credit line is likely to be welcomed by a sharp move higher for risky assets. The Eurostoxx index has been a beneficiary of the ECB’s OMT programme and expectations about Spain. It is close to its highest level of the year – 2,600 – which is now a key resistance level. If Spain does apply for the credit line and the OMT is triggered then these events could be a big enough fundamental driver to get the Eurostoxx index over this hurdle and ready to embark on another leg higher as we move to the end of the year.

The commodity sphere is joining in the relief rally and both gold and Brent crude oil are higher this morning. $116.50 is key resistance level for Brent – it is at the top of its range from end of July. We don’t think Brent will spend too much time above this level and instead believe it will range-trade for the medium term between $108 and $117 per barrel.

The CAD lags its commodity currency pals

Today’s rally has even helped CAD. It has come under intense pressure in recent days after some dovish comments from the Bank of Canada. Whereas the market has been willing to shrug off dovish RBA comments and the Aussie has recovered some of its poise this week, the Cad has lagged its commodity brethren. But today it’s all about risk on. Domestic fundamentals do not matter – Spain is the focus. After venturing inside the daily Ichimoku cloud, USDCAD could be at risk of a decline back to key support at 0.9835 then at 0.9800 –the Tenkan. As long as 0.9830 holds then this cross could correct lower for a day or two before continuing higher towards 0.99.

Watch out for deterioration in the UK labour market

The pound could be a big mover later today as we have key data releases including labour market data and BOE minutes. Some things to look out for: 1, a jump in the claimant count. This has been trending lower since June last year and if it starts top pick up then people could worry that the  good run of labour market data is coming to an end, which would be pound negative. 2,  The minutes of the last BOE meeting may show some concern that inflation may not fall further this year (it has fallen sharply already) due to commodity price increases. These minutes are important as there is some expectation in the market that the BOE will do more QE next month, so if there is a hint of hawkishness in the minutes this may be pound positive. It could be a volatile morning for sterling. It is currently testing 1.6120 – the Kijun line on the daily Ichimoku cloud chart. Weak labour market data and dovish minutes could cause GBPUSD to buck the “risk on” trend today and weaken back to the 1.6050 mark. However, for as long as the euro remains on its roll then GBP should be fairly well supported. Resistance lies at 1.6155 then at 1.6205 in the near term.

Ones to Watch: GBPUSD and USDJPY

GBPUSD: hourly chart, the bearish crossover in hourly MACD suggests some short term weakness in this cross.


USDJPY: daily Ichimoku chart. Yesterday we mentioned that this cross was testing a pivotal level – the top of the daily Ichimoku cloud at 78.80 – it hadn’t been above the cloud since April. This pair hasn’t managed to break above this level, which is interesting as when risk is on UDDJPY tends to do well. While 78.80 is likely to be a sticky level, if we don’t break above here then it may suggest some investor nervousness, so watch where this cross goes next.



Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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