Daily Report: Greenback Slips Versus Other Major Currencies after S&P Downgraded its AAA Rating to AA+

The greenback fell across the board and hit fresh record low against the Swiss franc after Standard & Poor's downgraded U.S. top credit rating from AAA to AA+, the decision raised concerns over the fiscal issue of the world's biggest economy. Although the Federal Reserve Open Market Committee are going to meet tomorrow, traders can't wait and sold the greenback versus all other major currencies, added to concern the fiscal health of the world's biggest economy is slipping. The single currency rallied and broke above last week's high of 1.4375 to as high as 1.4432 in part due to the news that the European Central Bank already started buying Italian and Spanish bonds in order to stop eurozone debt crisis from spreading to the region's third and forth largest economies, however, some traders worried that IMF's rescue funds may only be enough to save Span but not in the case of Italy and of course not for both countries. S&P's also signaled the United States still at risk of further downgrade in the next 12-18 months and there is 1/3 chance that current lowered AA+ status may cut again to AA if the agreed reductions in the nations' spending could not be reached. Earlier this month, after affirming their AAA credit ratings for the U.S., the other two rating agencies, Moody's and Fitch also indicated that downgrades were still possible if lawmakers fail to formulate effective debt-reduction measures. Although the single currency retreated from intra-day high of 1.4432 after initial rally, bids from short-term speculators are reported at 1.4290-00 and more buying interest is tipped at 1.4240-50, on the upside, offers from European names are noted at 1.4370-80 and mixture of offers and stops seen in the region of 1.4430-60. Cable also opened sharply higher this morning and broke above previous resistance at 1.6477 before retreating from 1.6478 (stops above 1.6480 and 1.6500 are still safe for the time being with sizeable offers ahead of both levels, however, bids from Asian and Middle East names are reported at 1.6390-00 and further out at 1.6350-60.

Dollar also slipped against the Japanese yen after last week's intervention by Bank of Japan on behalf of the Japan's Ministry of Finance, it seemed the downgrade by S&P's overshadowed joint statement from Group of Seven nations which stated that in view of the falling confidence of global investors, they will take every action necessary to stabilize financial markets. MOF Noda explained their actions last week was aimed at checking speculations and disorderly market moves and although he also told reporters after the emergency G7 phone meeting that they are ready to intervene the currency market again to stop yen's strength, Moody's Investors Service warned that their efforts were ineffective in weakening the country's currency and were seen negative for its fragile economic recovery and sovereign ratings. USD/JPY just broke below 78.00 level in part due to selloff in regional stock markets, however, some bids are reported at 77.50 and 77.00 and traders still believe the MOF will intervene again if the level of 77.00 is at risk, stops are reported below 76.70/75 and sizeable stops remain below record low of 76.25. On the upside, offers are tipped at 78.40-50 and further out at 79.00/10 with stops only emerge above 79.50.

Elsewhere, global stock markets turmoil drew more safe-haven demand and continued to push Swiss franc higher to another record high against the greenback at 0.7480 earlier today, Hong Kong, Shanghai and Korean stock indices both dropped 4% and Nikkei also slipped over 2% this morning whilst gold surged to another historical high above US$1700. Aussie extended recent fall this morning on risk aversion and stops below 1.0370 and 1.0350 were trigged, however, decent demand should emerge below 1.0300 level and further out at 1.0250 which should limit downside for the Australian dollar for the time being.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.4121; (P) 1.4209 (R1) 1.4364; 

EUR/USD's b break of 1.4371 minor resistance indicates that choppy pull back from 1.4537 has likely finished at 1.4054 already. Intraday bias is flipped back to the upside for retesting 1.4537 first. Break will confirm resumption of the whole rally from 1.3837 and should target 100% projection of 1.3837 to 1.4537 from 1.4054 at 1.4754 next. On the downside, though, below 1.4239 minor support will turn bias neutral and mix up the near term outlook again.

In the bigger picture, EUR/USD is still trading above medium term trend line support from 1.1875 (now at 1.3835) and thus, rise from there should still be in progress. We'd continue to favor the bullish case that correction from 1.6039 has completed with three waves down to 1.1875 already and above 1.4939 will target 1.5143 resistance first. Break will affirm the bullish case of long term up trend resumption for another high above 1.6039. However, sustained trading below the mentioned trend line support will indicate that there should at least be one more medium term decline, possibly for below 1.1875, before correction from 1.6039 completes.

(Note :: I should say that it offers us additional evidence. According to a Senate investigation concluded earlier this year — a probe that was greeted with a collective "ho-hum" by the corporate media — S&P and Moody's, another leading agency, “issued the AAA ratings that made ... mortgage backed securities ... seem like safe investments, helped build an active market for those securities, and then, beginning in July 2007, downgraded the vast majority of those AAA ratings to junk status.” And when they did, it “precipitated the collapse of the [mortgage-backed securities] markets and, perhaps more than any other single event, triggered the financial crisis. (PDF)” )