Moody’s cut Spain’s debt rating on Thursday, pushing the euro lower and deepening the sense of crisis in the currency bloc on the eve of a crucial summit.
The euro hit an intraday low against the dollar of $1.3791 and traders warned it could fall further in coming days due to market concerns that Friday’s 17-nation meeting and a summit of the full 27-nation European Union on March 24-25 may fail to agree on decisive action to tackle the debt crisis.
“If officials make no progress and Germans remain unwavering in their demands, the likelihood of a capitulation (in the euro) will be significantly higher,” said Jessica Hoversen, currency strategist at MF Global in Chicago.
She said that hawkish rhetoric from the European Central Bank was adding to investor concern. “The ECB’s disregard for economic variances may be the tragic flaw that drags the currency lower,” she said, adding that the compromise of $1.3862, the February 2011 high, opened downside potential.
“The euro seems to be under pressure given the downgrade from Moody’s,” Mary Nicola, a currency strategist at BNP Paribas SA in New York told Bloomberg. “Weaker-than-expected trade data out of China and Germany, all of those are putting pressure on the euro.”
The euro may decline to as low as $1.3538, Karen Jones, head of fixed-income, commodity and currency technical analysis at Commerzbank in London, told Bloomberg. “A break below support at the 20-day moving average at $1.3752 targets a move down toward $1.3538, the 55-day moving average,” she said.
BNP Paribas said in a note that it expects euro/dollar to test the major up trend line support at the $1.3775 level. “This has been in place since the beginning of the year and is very significant,” it said. A break below it would signal a larger correction of recent gains targeting $1.3710. The bank said it continues to view any euro/dollar pullback as a correction of the gains seen since the beginning of the year. BNP has raised its medium-term euro/dollar forecast to $1.46.
Camilla Sutton, chief currency strategist at Scotia Capital in Toronto, said the near-term technical picture is in the midst of turning negative for the euro. “Since the market has built up significant long positions, EUR is vulnerable to profit taking. With today’s decisive break below 1.3860, we expect further near-term downside and expect a near-term test down to the 50-day moving average of 1.3575 is reasonable.” Their medium-term bullish euro outlook, however, has not changed.
London-based UBS FX analyst Geoffrey Yu said the Spanish downgrade showed the euro zone’s debt crisis is far from over. He said risks also stem from Europe’s inability so far to agree on a framework for a debt rescue fund.
Financial markets are also concerned about the growing risk that Greece and Ireland may have to restructure their debts despite EU/IMF bailouts which have only bought time. Greek 10-year bond yields rose to a post-crisis high above 12.8pc and two-year yields have risen sharply.
“There appears to be a growing risk that Greece could struggle to meet its financing needs before too long,” Capital Economics said in a research note. “We think that the markets’ increasingly gloomy stance is justified.”
However, Greg Anderson, a currency strategist at Citigroup in New York, remained more upbeat. “It’s a broader risk-off move. It’s a reversal of what had rallied the most,” he told Bloomberg. “The euro is outperforming the Aussie, Swedish krona and Norwegian krone.”
6:00AM GMT 11 Mar 2011
Source: The Telegraph