S&P Downgrade of Italy Adds to Asmussen Damage

The euro fell below 1.28 as a central bank hawk turned dove and S&P dpwngraded Italy. Cable also fell to the lowest since 2010. Chinese trade data coming up next.ECB governing council hawk Jorg Asmussen knocked the euro nearly a cent lower after saying he would not rule out a new LTRO and that the ECB's forward guidance stretches beyond 12 months. A second blow for the euro came as S&P downgraded Italy one notch to BBB, just two levels above junk.The lone long in EURGBP hit its final target at 0.8640 after USDJPY filled the final limit at 101.20. EURUSD shorts await fill, while USDCHF and USDCAD longs await. Full details are found in the latest Premium Insights.

EUR/USD was trading at 1.2860 before Asmussen and the downgraded and as low as 1.2757 afterwards. Along the way, it took out support at the May low of 1.2797. Focus now moves to the 2013 low of 1.2745.

The pound was already falling on soft industrial production and trade data when the breakdown of the euro sparked a broader rush into dollars. Earlier in the day the March low of 1.4832 held but it broke on a second try and stops tripped down to 1.4813. There was little initial follow-through, however, and the pair bounced back to 1.4861.

We wrote about the resilience in the Australian dollar yesterday and that was the case once again. AUD/USD was hit by a global growth downgrade from the IMF, which now sees a 3.1% expansion this year compared to 3.3% in its April forecasts. The kneejerk reaction was to sell AUD down to 0.9135 from 0.9200. This broke the European low but there was no follow-through selling.

The focus tomorrow will be the Australian employment report but today's data is focused on Japan and China. At 2350 GMT, Japan's corporate goods price Index for June is expected to rise 1.2% y/y in a test of pipeline inflation.

The main event is at 0200 GMT when Chinese trade balance numbers are released. Don't focus on the surplus, instead look at the rise in imports/exports. They are forecast to climb 3.7% y/y and 6.0% y/y, respectively. Less would be a negative sign for China and commodities currencies.