Potential Sovereign Credit Downgrades Render Spanish Bonds To Junk…


(ES) Hearing renewed speculation that Spain could encounter another sovereign downgrade:

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Current Major Rating Agency ratings and recent action for Spain:

  • On Jun13th Moody’s cut Spain to Baa3 (3 notch cut); outlook negative
  • On Jun 11th S&P stated that Spain’s BBB+ rating was not affected by the banking sector; outlook negative
  • On Jun 7th Fitch cut Spain to BBB (3 notches); outlook negative

The key would be to see which rating agency would bring Spain to junk status:

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  • A one notch cut by Moody’s would accomplish that
  • S&P would need to cut Spain three notches to bring it to junk status
  • Fitch would need a two-notch cut to bring Spain to junk status

How to interpret these headlines?

Here’s a little overview: After a series of negative developments in the Euro Zone and the fact that ECB failed to re-assure investors during the last ECB Meeting, EURUSD is now making a new low for the past 24 months and potentially heading towards the June 2010 low at the 1.1875 levels…

If any of the three major credit rating agencies performs sovereign credit downgrades on Spain, rendering it’s bond to junk bond status, I believe it would add more pressure to the Euro and potentially be the catalyst that drives the EURUSD beyond the 1.2000 level, especially considering the lukewarm NFP report on Friday and showed that the U.S. Employment sector still has not deteriorated enough to warrant any further Fed reaction…  Therefore, I am now looking at Selling the EUR on any strong rallies, and I have my target set at the psychological 1.2000 level.

Of course, the currency market is fluid and due to the 4th of July holiday week, market liquidity is thin.  The market is expected to act with more liquidity in the coming weeks, and considering the potential sovereign credit downgrades along with a positive FOMC Minutes (July 11, 2012), we may have the perfect combination for EURUSD to test the 1.2000s.

 

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About Henry Liu

My name is Henry Liu and I am a Forex Trader and Mentor. I help traders achieve consistent income trading Forex while spending less time trading. My focus in trading is a combination of Fundamental Analysis, Technical Analysis, and Market Sentiment. Far too many retail Forex traders concentrate on just one aspect of trading, technical analysis, and ignore everything else; it is my goal (and vision) to educate every trader on how to take advantage of news trading and become more balanced traders.

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