Euro Plunges on Portugal Downgrade

The Euro broke through its recent low at 1.3440, plunging sharply lower after Fitch downgraded Portugal’s credit rating.

The Euro broke through its recent low at 1.3440, plunging sharply lower after Fitch downgraded Portugal’s credit rating. Coupled with on-going concerns regarding efforts by Greece to obtain financial aid from either the European Union or International Monetary Fund, this latest development could worsen if additional cuts are applied to Spain, Italy and Ireland.

Overnight Fitch announced it had downgraded Portugal one level to AA- and warned further cuts would be forthcoming unless the country takes care of its ailing finances. Additional pressure could be on the Euro if the other credit rating agencies, the S&P Corp. and Moody’s, reaffirm Fitch’s assessment. Furthermore, traders are reacting as if this situation will spread to other sovereign nations as the European Union continues to drag its feet amidst the already dire Greek outlook.

After closing Tuesday off its low following the news that France and Germany were leaning toward accepting a Greece financial aid package from the IMF, the Euro weakened shortly before the Fitch news on the notion that financial aid from an outside entity would appear to be a weak signal from the European Union. This was almost a complete about face from yesterday’s late session rally which helped push up demand for higher yielding assets and currencies.

According to the recent CFTC’s Commitment of Traders data, short traders continue to control the direction of the Euro. Although efforts have begun to curb excessive short speculation in the European single currency, it looks as if bearish speculators are in control and have called the direction of this currency precisely.

The Dollar is rising across the broad against all major currencies as investors seek protection from the drop in higher yielding assets. Fear could spread throughout the markets today if support for the Euro continues to erode. Investors are showing their support for the Dollar by selling off equities, gold and crude oil overnight. In addition, the Dollar Index has soared to a new high for the year.

The GBP USD is trading lower, but has not reacted as badly as the Euro despite renewed fears that the U.K. faces a similar downgrade and warning from credit rating agencies. The British Pound also remains vulnerable to the downside because of the weakening economy and the threat of a ‘hung Parliament” based on poll survey results ahead of the upcoming election.

Overnight, the USD CHF reached a 50% level at 1.0703. This completed a retracement of the recent break from 1.0897 to 1.0506. Upside momentum could take this market to 1.0749. Talk is circulating that the Swiss National Bank has been actively intervening to prevent its currency from rising relative to the Euro. This is raising come concerns that the SNB will soon be listed as a currency manipulator by the U.S. Treasury Department.

Expectations for impending volatility proved to be true for the USD JPY as this market broke out to the upside through a long-term downtrending Gann angle at 90.40. In addition, buying pressure helped this market regain a key 50% level at 90.95 and change the trend to up on the daily chart on a trade through the last swing top at 91.08. The next minimum upside target is a .618 level at 91.62. Gains could be limited if stocks break sharply and traders seek safety in the lower yielding Japanese Yen.

The USD CAD is trading better and has regained an old bottom at 1.0205. The current chart formation suggests impending volatility with a bias to the upside. After confirming a closing price reversal bottom at 1.0060 earlier in the week, this market appears to be building upside momentum which could send this market soaring to a major 50% level at 1.0369.

The AUD USD is trading lower but has not reacted nearly as much to the downside as one would have expected following the developments in Europe. The current chart pattern suggests that this market has room to break to the downside with .8914 a potential target over the near-term. Investors seem to be taking a “wait and see” outlook ahead of the opening of the U.S. stock markets. A plunge in U.S. equity markets in reaction to the weakness in the Euro could send investors scurrying out of higher yielding currencies.

A similar situation to the one developing in the Aussie Dollar is taking place in the NZD USD. Traders are shying away from aggressively shorting this market ahead of the U.S. stock market opening and in front of a minor retracement zone at .6992 and .6948. A shift in risk sentiment back toward risk aversion could pressure the New Zealand Dollar.