The euro reacted calmly in Asia to Friday’s wave of downgrades from S&P. EURUSD managed to hold just above Friday’s low and trading was confined to a range between 1.2626 and 1.2661. USDJPY traded 76.81-77.13. S&P stripped France and Austria of their AAA ratings at the New York close, downgrading each by one notch to AA+. The move was part of a mass review of the ratings of 15 out of the 17 Eurozone sovereigns announced on Dec. 5. In all, the ratings of nine Eurozone countries were cut. Although the French downgrade was expected, the euro fell very sharply late on Friday as Eurozone government officials warned that downgrades were imminent. Crucially, Germany’s rating was affirmed at AAA − the ratings of Belgium, Ireland, Finland, Netherlands, Estonia and Luxembourg were also unchanged. Other countries were not so fortunate: Italy, Spain, Portugal and Cyprus each suffered a two-notch downgrade. This was enough to see Italy fall to BBB+, taking it below the important A-/BBB+ threshold for the first time and only three notches above ‘junk’ status. Apart from France and Austria, the ratings of three other countries were cut by a single notch: Malta, Slovenia and Slovakia. Earlier, demand at Italy’s first auction of the year was lukewarm considering the relatively small supply, and this started the euro on its downward trajectory before the ratings news broke. Separately, Reuters reported that a clearing house had raised initial margins on Italian sovereign debt. Elsewhere, talks between Greece and the IIF on the terms of a voluntary debt restructuring appear to have broken down, at least temporarily. Our Eurozone rates strategists expect these negotiations to ultimately fail, paving the way for a hard Greek default. Given the overwhelmingly euro-negative news and the likelihood of more to come, we are entirely comfortable to remain short EURUSD as a trade recommendation. The US is on holiday today for Martin Luther King Day.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank