Despite the downgrade threat, traders find it hard to offload the euro more aggressively
The euro dipped on Tuesday after Standard & Poor's said it may carry out a mass credit downgrade of euro zone countries if their leaders fail to move decisively on solving the region's debt woes at a summit later this week.
Risk currencies came under further pressure after the Reserve Bank of Australia in a widely expected move cut rates by 25 basis points and left the door open for further easing, sending the Australian dollar to $1.0190, down from a peak of $1.0305 hit overnight.
The unprecedented warning to downgrade 15 countries including top-rated heavyweights such as Germany and France came hot on the heels of a Franco-German initiative, to be discussed on the Friday summit, to impose budget discipline across the euro zone through treaty changes.
Despite the threat, traders found it hard to offload the euro more aggressively and let it hover at $1.3371, above some vital support levels, but down from Monday's high of $1.3487, and cautiously waited for a European Central Bank meeting on Thursday.
"You can see that the EU leaders are trying to get their act together, but even if their plans are realised, it's not going to improve their dire finances overnight. This is going to be a drawn-out process," said Koji Fukaya, chief FX strategist at Credit Suisse, adding that the euro will not easily get any serious respite.
"Italy and other countries have embarked on belt-tightening measures and that has already seen a positive reaction from the markets, but doubts about the implementation of these policies linger. The move by S&P partly reflects these worries."
The euro avoided a sell-off as traders hoped a summit agreement, together with deficit-reduction steps by debt-laden countries would pave the way for the ECB to move more aggressively to calm the turbulent euro zone bond market.
The bank has so far been reluctant to buy up bonds of heavily indebted states, concerned this would take the pressure off them to sort out their finances, but signalled it may change its stance, depending on what EU policymakers come up with.
Still, any bounce is likely to be limited to short-covering, and levels around $1.3550 may be the extent of any near-term rally, traders said. "What everybody probably thinks is that the euro is still not a currency you want to buy," said a trader for a Tokyo brokerage.
More optimistic analysts suggested the euro may correct back to $1.3729 or even as high as $1.3851, respectively 50- and 61.8-percent retracements of its decline in November.
Stop-loss euro offers were spotted right below session lows, around $1.3350-60, in an area marked by a moderate support level at the Sept. 26 low of $1.3360.
Following the RBA cut, the Australian dollar moved a little further away from its peak last week of $1.0335. After the bank said "the inflation outlook afforded scope for a modest reduction in the cash rate", some analysts suggested a further cut by 50 basis points by March is likely.
"It's a good decision and it recognises the slowdown in the global economy has developed some further momentum, particularly in our region," said Paul Brennan, head of market economics at Citi.
"The inflation outlook for Australia is consistent with the 2 to 3 percent target. So that gives the Reserve Bank a little bit more room to nudge rates down further into the neutral zone," he said.
A sustained break of the $1.0200 level would target Thursday's 1.0150 low, traders said.
With the euro's downside limited, the dollar index struggled to make much headway. It drifted up 0.1 percent to 78.705. Against the yen, the greenback edged up to 77.78, but, as during the last couple of sessions, struggled to break above the 78.00 yen barrier.
Risk on Risk off range trading is the theme sooner or later pain need to be taken. The difference between sovereign and corporate rating is for a company what it drives it to default is an inability to get hold of money to pay back its debt. Countries are different because they have sovereignty over their currency which means that default can come in the form of not paying back debt or accepting devaluation and or inflation. Euro zone economies are different because no single one has sovereignty over its currency. On that basis the overnight move by s&p yet again represents the agency catching up with the reality markets recognised ages ago. Meantime remain headline trading wait for Merkozy baked cake outcome.
-You have missed the part where the countries members of the Euro can issue debt but can not print currency. If Spain, Greece, Italy (or France) want to monetize their debt they need to get the ECB to authorize the printing of new euros
-Germans -Then not all the countries can get their way out by printing currency. Most emerging countries had no option but to issue foreign-denominated (US$ generally) debt
-And finally, even those countries who issue debt in their own currency may be penalized if the yield is linked to the inflation to provide investors with that level of assurance (South Africa would be a good example)
-Finally, when default becomes an option it is not as simple as you make it sound. Assets can be seized abroad (planes and ships, bank accounts... you name it) And legal recourse, depending on the bond sheet can be sought at international courts. Sovereignty is not such an absolute concept as many people in this region seem to think
Enough for today