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Tuesday April 27, 2010 - 20:07:17 GMT
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S&P Downgrade Sends Euro Plunging

The Euro plunged sharply lower and threatened to take out the recent bottom at 1.3201 after the S&P Corp. lowered Greece’s ratings to below-investment grade and cut Portugal’s long-term ratings from A+ to A-. The cut to junk status by S&P Corp, is another sign that conditions are expected to worsen. Adding Portugal to the mix indicates that the rating service believes the crisis is spreading and the outlook remains negative.

What the S&P downgrade has effectively down was give permission to the hedge funds to continue to aggressively short the Euro. It has also served as a warning to Ireland and Spain to get their finances in order. Furthermore, the downgrade also signals that the S&P Corp. is not going to wait for the European Union and the International Monetary Fund to reach a decision regarding the bailout package for Greece.

Hedge funds are most likely licking their chops over the downgrade news. It seems at times they have taken heat for exasperating the situation in Greece, but with today’s downgrades, it appears their shorting activity has been vindicated.

The announcements by the S&P Corp. sent U.S. stock markets sharply lower while substantially lowering demand for higher risk assets. Commodity linked currencies such as the Australian Dollar, New Zealand Dollar and Canadian Dollar broke sharply lower on the news while demand for lower risk assets drove the Japanese Yen higher.

From a technical perspective, traders should watch for the EUR USD to take out the recent bottom at 1.3201. The last two times the Euro made a new low for the year an announcement came out to trigger a short-covering rally. This time no such announcement is expected so the Euro is likely to accelerate to the downside.

Pressure from the Euro is also driving down the GBP USD. This news comes on the heels of bearish economic reports overnight as well as a shift in the polls which indicates no clear winner is emerging 10 days before the election. This is making traders nervous because it may lead to a hung parliament which would curtail any attempts to fix the budget deficit.

The news that is breaking the Euro is also driving the USD CHF higher. Traders are now anticipating the Euro Zone’s economic problems to spread to the Swiss economy. In addition, traders anticipate the Swiss National Bank to be a little more active in the intervention market in an effort to protect its economy and the Swiss export market.

In one day the USD JPY had retraced more than 50% of the 91.59 to 94.35 range to .92.97. Greater demand for lower risk assets is helping to drive the Japanese Yen higher. Traders are dumping stocks and repatriating funds back to Japan in an effort to repay borrowed funds.

Weaker Gold and Crude Oil are helping to drive the USD CAD sharply higher. After forming a closing price reversal bottom at .9929 late last week, the Dollar/CAD has found nothing but buying support from institutions and banks. Today’s strong action has this market in a position to challenge the recent top at 1.0215. A breakout over this level will turn the main trend higher. Look for upside momentum to continue if investors continue to dump higher priced assets.

The drop in demand for higher priced assets is helping to drive the AUD USD sharply lower. This morning the Aussie plunged through 50% support at .9194 and seems well on its way to the .618 level at .9148. The firing of sell stops under a pair of Gann Angles at .9221 and .9230 also helped trigger an acceleration to the downside. Watch for a change in trend to down on the daily chart if the Aussie breaks the last swing bottom at .9157.

After breaking through a pair of retracement levels on Monday and signaling an upside breakout, the NZD USD has reversed course and is now feeling selling pressure. A shift in risk sentiment out of higher yielding currencies is causing today’s break. Although this market bounced off of an uptrending Gann Angle at .7097 this morning, this angle has clearly been identified as the key breakdown point. A move through this angle is likely to trigger an acceleration to the downside.

On April 28th, the Reserve Bank of New Zealand will announce its interest rate decision and policy statement. Although interest rates are expected to remain the same this month, talk has been circulating that the policymakers are likely to release a more hawkish statement and may actually be planning to raise interest rates sooner than expected. Today’s trading action seems to be indicating that traders are reducing risk in the Kiwi as sentiment is shifting away from risk. Look for this market to settle between .7124 to .7199 until market volatility calms. Should more negative news hit the markets regarding Greece then look for further downside pressure.


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