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Euro Tumbles on Egan Jones Spain Downgrade; Correlations Favor Losses

Euro Tumbles on Egan Jones Spain Downgrade; Correlations Favor Losses

2012-05-29 17:30:00
David Rodriguez, Head of Product
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The Euro fell to fresh multi-year lows as Egan Jones downgraded Spain’s sovereign debt rating yet again, and cross-market correlations suggest the EURUSD could continue falling on a surge in Spanish bond yields. The short-term link between Spanish 10-Year Government Bond Yields and the Euro/US Dollar trades near record strength.

During the heights of the global financial crisis in 2008, it was popular to call many large banks and financial institutions “too big to fail”. Given that Spain’s economy is nearly 5 times the size of Greece, we think it’s “too big to bail out”.

Further Euro Zone debt struggles are all but guaranteed, and the Spanish fiscal crisis could force further EURUSD losses.

Forex Correlations Summary

View forex correlations to the SPDR Gold ETF Trust (GLD), United States Oil Fund ETF (USO), SPDR Dow Jones Industrial Average ETF Trust (DIA), UK FTSE 100 Index, and IShares Silver Trust ETF (SLV) prices.

GLD

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.80

0.75

-0.53

0.65

-0.34

0.72

-0.77

1 Month

0.57

0.04

-0.56

0.39

0.03

0.44

-0.66

3 Month

0.56

0.25

-0.31

0.50

-0.18

0.49

-0.61

1 Year

0.19

0.17

-0.20

0.25

-0.17

0.24

-0.28

USO

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.83

0.83

-0.30

0.79

-0.59

0.84

-0.79

1 Month

0.40

0.18

0.14

0.59

-0.53

0.70

-0.43

3 Month

0.43

0.40

0.08

0.70

-0.63

0.69

-0.50

1 Year

0.48

0.37

0.00

0.64

-0.63

0.59

-0.53

DIA

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.21

0.20

0.01

0.23

-0.42

0.21

-0.19

1 Month

0.21

0.25

0.51

0.46

-0.69

0.52

-0.15

3 Month

0.38

0.44

0.37

0.61

-0.71

0.57

-0.36

1 Year

0.64

0.55

-0.05

0.80

-0.82

0.76

-0.69

FTSE100

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.03

0.18

0.87

0.06

-0.23

-0.01

0.20

1 Month

0.17

0.11

0.64

0.25

-0.58

0.30

0.06

3 Month

0.37

0.35

0.37

0.56

-0.67

0.52

-0.31

1 Year

0.46

0.37

0.01

0.69

-0.67

0.65

-0.55

SLV

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.66

0.72

-0.03

0.65

-0.34

0.73

-0.59

1 Month

0.47

0.03

-0.48

0.25

-0.01

0.41

-0.53

3 Month

0.53

0.33

-0.20

0.60

-0.39

0.61

-0.61

1 Year

0.33

0.27

-0.16

0.39

-0.36

0.39

-0.40

Perfect Positive Correlation:

1.00

Perfect Negative Correlation:

-1.00

Correlation between Euro/US Dollar Exchange rate and Spanish Bond Yields

forex_correlations_egan_jones_spain_euro_lows_body_Picture_1.png, Euro Tumbles on Egan Jones Spain Downgrade; Correlations Favor Losses

Euro/US Dollar Exchange Rate (lhs)

Inverse of the Spanish Government 10-Year Bond Yield (rhs)

The Euro has tumbled to its lowest levels against the US Dollar (ticker: USDOLLAR) since 2010 as investors flee the risk-sensitive EUR in favor of the safe-haven US currency. We saw the Euro fall to fresh lows as ratings agency Egan Jones downgraded Spanish debt and left outlook on future ratings ‘negative’.

Spanish bond yields have surged near their highest levels in decades—a clear sign that investors increasingly price in the risk of default or at the very least great funding difficulty. Bond yields move inversely to price, so a sell-off in Spanish bonds would lead to higher borrowing costs for the Spanish government.

Given that Spain is the fourth-largest economy in the Euro Zone, it remains critical to watch whether the Spanish government is able to meet deficit and debt financing needs. That said, we see no easy resolution to this crisis in confidence, and further drops in Spanish bond prices/rise in yields could push the Euro to further lows.

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To contact David, e-mail drodriguez@dailyfx.comTo be added to David’s e-mail distribution list for this and other reports, e-mail subject line “Distribution List” to drodriguez@dailyfx.com

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