Euro resilient to Italy’s downgrade, says Hubard

Moody’s downgrade of Italy by two notches to Baa2, has barely been registered by the euro, currently trading at 1.218 against the US dollar, according to Bill Hubard, chief economist at Markets.com.

“We think that part of the EUR-relative resilience has to do with the release of the Chinese GDP numbers for the second quarter, which did not confirm fears of imminent hard landing in the world’s second largest economy. In addition, it seems that some negatives are already in euro price,” he said.

Italy’s rating is now a notch above that of Spain and only two notches above junk rating. The downgrade brings Moody’s one notch below S&P (BBB+) and two notches below Fitch (A-).

According to Hubard, the rating agency highlighted the deteriorating growth outlook for Italy and the risk of contagion from other troubled euro zone members as reasons for the downgrade.

“We think that the risks for the single currency could remain on the downside for now. Investors will await the outcome of the Italian BTP auction later today looking for indications of sagging demand for sovereign paper after the downgrade,” he said.

Moreover, EUR/USD could come under renewed pressure if Italy and Germany bond yield spread widens in response to a potentially disappointing auction.

“The yield difference between 10-year BTPs/Bunds remained at ‘around’ 480 bps, a high level that is frustrating the government in Rome and that Federico Ghizzoni, who heads UniCredit called ‘unsustainable’,” said the economist.

He added: “Over the longer term, we think that the downside pressure on EUR will remain in place as investors continue to flee the peripheral sovereign debt markets and portfolio outflows from the eurozone remain unabated.” 

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