Intraday Market Thoughts

S&P Cuts up Europe, Shorts at Fresh Record

by Adam Button
Jan 14, 2012 14:45

Early Leaks about an avalanche of European downgrades led to messy, risk averse trading to close out the week. On Friday, NZD and USD were the best performers while EUR and CHF lagged. In Fridays CFTC positioning data, EUR shorts hit another record. Link to Ashraf's euro interview w/ Maria Bartiromo is below.

S&P downgraded nine eurozone countries after the US close: Italy, Spain and Portugal were cut two notches; France and Austria lost their top ratings, slipping one notch to AA+; Ireland was affirmed at BBB+ but the outlook lowered to negative.

The lone good news was Germany affirmed at AAA and its outlook revised to stable. Every other eurozone nation now carries a negative outlook, except Slovakia, which was downgraded to A from A+.

Euro trading was disjointed ahead of the official announcement because ratings agency policy dictates that leaders be notified 12 hours in advance of a downgrade. Leaks began shortly after the notices, sending EUR/USD down as much as 250 pips to a 16-month low of 1.2623.

The downgrades werent the only factors hurting the euro. Greek debt restructuring talks broke down on Friday and the ECB criticized a draft of Europes fiscal discipline treaty, saying it was substantially watered down and could be easily circumvented.

In all the excitement, economic data was nearly forgotten with the U of Mich consumer sentiment survey improving to 74.0 from 69.9, beating the 71.5 consensus.

Ashraf gives his euro outlook with CNBCs Maria Bartiromo on Friday as the downgrades were unfolding

CFTC Positioning Data

Overall USD positions climbed 10% to $17 billion, with only AUD, NZD and JPY moving positively against the dollar. That was far outweighed by increases in EUR, GBP and CAD sellers.

EUR shorts rose to a stratospheric 155K, up 16K on the week and another record. The next most-negatively held currency was GBP, where shorts increased 4K to 36K. That was followed by the unloved CAD where shorts increased 5K to -29K.

Yen longs increased 3K to 60K to the highest since March 2008, a danger sign for those worried about intervention. AUD continues to be the darling of the market with longs expanding 7K to 53.5K.


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