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EURUSD Tanks After Egan Jones Downgrades Spain…Again

EURUSD Tanks After Egan Jones Downgrades Spain…Again

Christopher Vecchio, CFA, Senior Strategist

The EURUSD was trading higher into the European session close today until rating agency Egan Jones announced that it would downgrade the Euro-zone’s fourth largest economy, Spain. The move to drop the country’s berated rating to ‘B’ from ‘BB-‘ comes only a week after the same agency downgraded Spain from ‘BB+’ to ‘BB-.’ The news is not surprising, however, considering recent economic and financial developments in Spain.

As the decision stated, “Spain will inevitably be faced with sizable payments to support its banking sector and for its weaker provinces.” Egan Jones supports this view by pointing out that the Spanish economy has been hobbled by the government deficit, which sits at 8.9 percent, and the country’s worsening labor market, whose unemployment rate sits just below 25 percent. The downgrade notice also notes that “Spain is short about €50 billion per year for social payments, €20 billion per year for interest, and an additional €30 billion for asset growth; hence the €100 billion per annum increase in debt.” Accordingly, Spain’s rating holds its negative outlook.

EURUSD 1-minute Chart: May 29, 2012

EURUSD_Tanks_After_Egan_Jones_Downgrades_Spain_Again_body_Picture_1.png, EURUSD Tanks After Egan Jones Downgrades Spain…Again

Charts Created using Marketscope – Prepared by Christopher Vecchio

The Euro was under pressure across the board on the news, as were other risk-correlated assets, with the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) surging back to fresh session highs at 10212.08. The EURUSD dropped from just under 1.2550 to as low as 1.2460, a fresh 2012 low, before rebounding to 1.2469, at the time this report was written.

--- Written by Christopher Vecchio, Currency Analyst

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