Euro Rot Continues

The steady drum beat of negative European news continues and the euro has been sold off in response.  It is not simply limited to the periphery, as we have pointed out.  There are rumors today that Belgium faces an imminent downgrade.  Recall that Belgium's outlook was cut to negative from S&P on Dec 14.  There is also increasing concern that France's turn may be coming. Our proprietary models warn that France is on the borderline and insurance via credit default swaps has tripled to over 100 bp.  

Lloyds Bank in the UK warned that it faces GBP7 bln loss on Irish loans and the ECB arranged a GBP10 bln swap line with the Bank of England before the weekend.  The Speaker of the Slovakian parliament called for preparing plans to drop out of the euro and reintroduce its own national currency  Greeks demonstrated against austerity. 

Meanwhile, the ECB expresses concern about Irish banking legislation on grounds that it may impinge on the ECB's ability to be kept whole--as the government secured the power to alter bond holder rights, including debt servicing (principal and interest) and default.  

Given the holiday mode of the markets, we don't want to exaggerate the significance of the nuances of the price action, but there are a few trend moves under way.  The euro is under pressure and is testing its 200-day moving average vs the US dollar, which comes in just above $1.3100 today.  The euro is making new record lows vs the Swiss franc and is off 2% against the yen since before the weekend.  The euro has broken down against sterling as well and is not convincingly through its 200-day moving average, which comes in near GBP0.8515.  The only currency of note that the euro is firm against is the Hungarian forint.  A rate decision is due shortly by Hungary and its central bank is likely to leave rates alone after unexpectedly raising them last month.