Fear is an aggressive behavior especially when it seeps into the core of the financial markets. Part of the reason whycurrencies are so trending is because when uncertainties grow, investors won’t hesitate to sell. However realistically, the risk of rating agencies downgrading Spanish and Portuguese debt to junk is minimal. Spain and Portugal do not have the same funding problems as Greece. The premium that investors demand to hold 10 year Greek debt overGerman bonds hit a record high of 700bp while the premium for Portuguese debt is 280bp and 121bp for Spanish debt, far below Greek levels. Yet these facts are not be enough to sooth investors who are preparing for the worst and will cringe at even a one notch downgrade.
There are still Unanswered Questions:
- Will all Governments approve the package
- Greek public unrest likely to continue /worsen
- Will it work / does it solve the underlying problem ( probably not)
- Contagion to other euro zone members.
As a result, its worthwhile to take a look at the next support levels in the euro. Here’s a weekly technical chart illustrating the strong possibility of the euro falling to 1.25.