The move by the rating agency to downgrade 9-European countries is a step in the right direction. It should not work according to the people or its leader's wishes or otherwise the credibility of the rating agencies already at stake after the damages caused by US housing collapse will take years to earn back.
After downgrading of USA, S&P gave ample time to the European policy makers and have finally decided to ring the alarm bell after sensing that Europe is still far away from reaching an understanding.
They have acted tactfully by allowing Germany go clean this time, probably giving signal that if nothing constructive happens in the coming months, Germany could be next in its downgrading chopping list.
This I say because many European countries despite being downgraded are still in the waiting list and carry a tag marked with negative watch, which means that if they are unable to take fiscal measures they are at a risk of being pushed further down.
Lot of people say that borrowing cost will rise due to downgrading.
I would like to recall that soon after the poor participation in German bond auction I have hinted in one of my write-up that Central Bank wants European auction to be successful in future, hence, there will be no more bond auction failures. So far I am proving to be correct in my assessment. Take clue from USA, its 10-year bond yield is down to 1.86 percent from around 2.5 percent.
Initially we may see European countries bond market under pressure because there is still big risk that European Financial Stability Facility (EFSF) could also be downgraded. Keep in mind that EFSF has to be raised to EURO One-Trillion from EURO 440 earlier announced, which after possible downgrading of EFSF could become tough.
Therefore, best time to enter the bond market will be when noise about Greece is on peak, because after exit, correction in bond market will take place.
Yes, if Germany disagrees to participate and refrain from printing notes then we may come across some tough period and then not onlyborrowing cost may become a worrying factor, but whole of Euro-zone nation will come under severe pressure.
What should be more concerning is that at the moment Investors in Europe are still hesitant to take risk by lending to the corporate sector or to banks and prefer investment in government bonds at negative return, which shows lack of confidence in the system that is brittle and in the policy makers because of their continued failure to reach an understanding, which does not bode well for the European economy.
Next week's hot topic will be Greece haircut, which may dominate the global financial market. So keep a close watch on the Euro-zone developments, which may provide guideline for the currency moves. The news so far Greece is discouraging and if talk fails, this could inflict severe injury to the European financial market, as Greece default will certainly have contagion effect.
S&P's statement that our ratings are less gloomy than markets has lot of meaning indicating that there are more bad days ahead. S&P note of warning could be due to PIIGS country's debt maturity that until April is estimated to be something around EURO 200 billion.
EURO @ 1.2667: Euro's up move fizzled out and comfortably closed below my target of 1.2775, which means we are still in a strong bearish mode. So the preferred strategy for the week would be to pick the top and sell Euro. Such trading method would protect from any major trading loss and most likely will provide opportunity to get rid of the position if caught wrong-footed.
Any up-move should find resistance at 1.2790, which is still the key level to watch. I favour downside move and the next crucial level to watch will be 1.2610, a break here would encourage for a test of 1.2445 or possibly 1.2350. However, if dip seen caution around 1.2445 for possible bounce back or else 1.2890.
GBP @ 1.5326: Euro weakness will surely drag Pound Sterling, but Cable has strong support around 1.5160, which may not easily surrender and only break would pave way for 1.4917. However, first resistance is at 1.5430 with next strong level to watch is 1.5580.
CHF @ 0.9520: Focus will remain on cross trading. As long as 0.9405 is capped, Swiss Franc will gradually move in line with other currencies, a break of 0.9675 will open gates for 0.9775. But break below 0.9335 would push for more SFR gains.
JPY @ 76.95: Focus will remain in range trading as YEN has strong resistance around 76.35, which may not be easy to crack. Break of 77.30 would encourage for test and break of 77.72 or 78.40 or else keep a close watch on 76.05, which could be threatening.
GOLD @ $1639: Needs to make a downside break of $1612 and a clean break of $1602 will further push gold down to $1570. However, a move beyond $1654 would encourage for test of $1670. Prefer selling on top side of the chart point.