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By Dean Popplewell

It seems that S&P officially has run out of patience with the euro authorities. The real surprise about the Spanish Debt downgrade is that it was announced late Wednesday and came from S&P rather than Moody's. Overall, it's not that surprising given the lack of growth prospects for Spain and with that negativity reinforced by questions over the ESM's funds. Will the emergency's program monies be used to recapitalize banks? Previously, S&P had reassured investors by affirming its ratings on Spain on the premise that euro assistance to Spanish banks "would be liable on a region wide basis and not held to individual sovereigns." The rating agency's action will likely add to the pressure on Prime Minister Rajoy to seek external assistance maybe as early as next week's EU summit. The next move will be much tongue wagging from supposedly ambivalent Spanish authorities.

Moody's currently has a Spanish rating that mirrors S&P's, but the fear now would be it moving to cut the country's debt status further. The agency has yet to complete its review for a potential downgrade, that's expected by the end of this month. Investors are likely to start reducing their exposure to Spain yet again, if need be, to avoid forced selling in case of further downgrades. Obviously this is expected to keep pushing periphery yields higher and make funding even more expensive for countries like Italy that came to the market this morning. Their borrowing costs rose at an auction of 3-year debt on concern of Spain's reluctance to request a bailout. Italian treasury sold +3.75b EUR to yield +2.86%, more than the +2.75% at the last auction. Investors bid for 1.67 times the amount offered, up from 1.49 times last month. They also managed to get away with a total of +2.25B of bonds due in 2016, 2018 and 2025. Naturally, the key risk for Italy remains Spain.

Elsewhere, G7 ministers meet in Tokyo. Japan will not miss this opportunity to seek to help in reducing the yen's value. However, it will be most unlikely for Japanese officials to receive or create any collaborative effort to do this. Most countries desire the same thing, a weaker currency. Again, investors should not bet on any G7 reassurance to shore up confidence in Spain or other euro peripheral countries. These meetings historically do not deliver surprising information. If anything, the chatter is that there could be talk that high oil and food prices may be mentioned; if so, this will only influence inflation fears. This morning's big rally in USD/JPY is due to Sprint's potentially being taken over by Japanese interest.

Fundamentally, there has been very little to look forward to. This morning's focus in the U.S. will be on jobless claims. Many expect the headline reading to squeeze a tad higher, especially after last week's strongish +367k print. North American trade data is anticipated to be a tad stronger, but not materially so that it will influence the dollar currencies. The EUR is expected to remain under selling pressure in the near term as investors remain unconvinced that Spanish officials will request any assistance any time soon. However, the State side open is telling a different story for now.

The single unit is trading firmer as a result of positioning. Despite the selling percentages skewed in its favor, it is up on the morning as investors unwind some of their negative bias towards the currency on the back of a small uptick in periphery bond demand demonstrated through the Italian auction. Can we expect this to last? The vulnerable side remains the right hand side as the weak short s/l look attractive on the top side, especially with option knockouts and sovereign buying. Trading momentum is expected to trigger the most vulnerable for now.

Assuming yesterday's tech positions have not been squeezed out in the temporary EUR exit rush overnight they still favor longs and are so from around yesterday's 1.2880 level. Their target is to print a 1.31 handle. Within the current price action, the risk reward looks to favor the top. Day charts are rolling over aided by options and sovereign buying. The bears will look to sell into the rallies as most try to improve on their short position average.

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Source: Surprise And Then No Surprise For The EUR