You are here: Markets » Euro Recovery Stalls After News of Moody’s Portugal Warning
from the BBH Currency Strategy Team
Turnaround Tuesday appears to be in force today, with the dollar softer and EM firmer. However, ranges are fairly narrow as trading slows and markets thin ahead of the Christmas holiday.
Euro staged a recovery during the Asian session, due in part to supportive comments from China official. Vice Premier Wang said that China supports the IMF crisis efforts and that China “has taken concrete action to help some EU members counter the sovereign-debt crisis."
However, the euro recovery was later nipped in the bud after Moody’s announced that it was putting Portugal’s A1 rating on review for possible downgrade. We have been highlighting downgrade risk for Portugal, as our model shows it as A-/A3/A- vs. actual ratings of A-/A1/AA-. Moody’s said it may cut "a notch or two" but added that Portugal’s solvency is not in question. While that would match our model rating, we think the market clearly has other ideas. We also note that euro zone sovereign ratings are a moving target, with budget and debt numbers set to deteriorate further in 2011.
EUR/CHF recovery also stalled on Portugal news, and is making new record lows just above 1.26 even as EUR/USD looks likely to again test support at the 200-day average today around 1.31.
Last week’s ECB bond purchases were much smaller than expected. At EUR603 mln, purchases were the lowest since the last week of October.
Spain reported tax revenues for the first 11 months of the year are up 11% y/y.
Peripheral bond yields are all higher. Ireland 10-year bond is the worst performer, with yield up 32 bp on the day. Greece is next, up 17 bp. With German 10-year yields flat, the peripheral spreads continue to widen.
Asian equity markets were largely up, and European equity markets have also started the day higher despite the ongoing concerns about the periphery. US index futures are pointing to a modest up open. No US data today ahead of the deluge Wednesday and Thursday. Canada CPI and retail sales data will be reported today.
BOJ kept interest rates steady, as expected, and said it will continue its asset purchases “steadily” to provide liquidity and to help support demand. Governor Shirakawa warned about the risks of rising in bond yields. No reactions in the FX market, as dollar/yen has traded in a 23 pip range so far today.
UK budget deficit was wider than expected in November (net borrowing of GBP22.8 bln reported) despite austerity efforts by the government.
Brazil mid-December IPCA inflation lower than expected, while November current account report to be released today. We still expect 50 bp hike in January. BRL flirting with 1.70 area on improved EM sentiment today. HUF remains soft, however, after yesterday’s surprise hike by the central bank.
About Marc Chandler
Marc Chandler joined Brown Brothers Harriman in October 2005 as the global head of currency strategy. Previously he was the chief currency strategist for HSBC Bank USA and Mellon Bank. In addition to frequently providing insight into the developments of the day to newspapers and news wires, Chandler's essays have been published in the Financial Times, Barron's, Euromoney, Corporate Finance, and Foreign Affairs. Marc appears often on business television and is a regular guest on CNBC and writes a blog called Marc to Market. Follow him on twitter.
Like us on Facebook
Follow Edward on Twitter
- AIIB Prelude to SDR Decision
- Repeat after me: sectoral balances must sum to zero
- Greek default
- Front-running the Fed on interest rate hikes
- Currency wars, the Swiss franc, policy divergence and Fed rate hikes
- Wolfgang Schaeuble the Salesman
- Five Investing Themes That Need Further Examination
- Why Understanding Money Matters in Greece
- Albert Edwards on China
- When do we decide that Europe must restructure much of its debt?
- How to look at the Greece bailout deal
- Negotiating strategies and political constraints regarding Greece
- A decision-tree framework for thinking about the Greek – Troika negotiations
- Tax Anticipation Notes: A Timely Alternative Financing Instrument for Greece
- Syriza and the French indemnity of 1871-73
- Gauging the financial crisis end game
- Why quantitative easing and negative interest rates will fail
- Pie in the Sky
- Yanis Varoufakis on fiscal waterboarding and Ponzi austerity
- The convergence of safe asset yields toward zero
-  Boom Bust, Fed edition
-  Raoul Pal: The Fed against the world means serious market and economic volatility
-  Preparing the market for rate hikes and more on oil, Saudi Arabia and ISIS
- Steve Hanke on China and Greece
- Daniel Alpert on the Euro and QE
- Andrea Terzi on inflation and QE
- Evan Engstrom on net neutrality
- Mark Weisbrot on Europe
- An Invitation to Yanis Varoufakis
-  The strong dollar and the very bad Austrian bank