(As written for My Paper on 1 May 2012. But alas, it was a public holiday and the article was not published. Because this article was written on Monday, please take note that the Trade Call is now INVALID.)
I am writing this article in the beautiful city of Zhengzhou in China, but the irony is that the focus this week is squarely on the shoulders of USA and Europe.
Late last week, Spain became the next victim to fall under the ratings knife again.
Ratings agency Standard & Poor’s lowered Spain’s long-term sovereign credit rating from ‘A’ to ‘BBB+’.
At the same time, it lowered the short-term sovereign credit rating to ‘A-2′ from ‘A-1′. The outlook on the long-term rating was negative.
According to the S&P, the downgrade reflected its view of mounting risks to Spain’s net general government debt as a share of GDP in light of the contracting economy.
The S&P also lowered the forecast for Spain’s GDP, expecting it to contract by 1.5% in 2012 and 0.5% in 2013.
Additionally, it stated that there was increasing likelihood that the government would need to provide further fiscal support to the banking sector. Morgan Stanley itself estimates that the country’s banks need about 50 billion Euros for Spain to push through its budget cuts.
Over the weekend, Spain’s largest unions led marches involving thousands of protesters in 55 cities. Besides the downgrade, the protests came after a worldwide report showed that Spain’s unemployment rate rose to 24.4% in the first quarter, its highest level in 18 years.
Elsewhere in the US, GDP figures were released on Friday.
The 2.2% growth disappointed traders and investors, who expected a reading between 2.5-2.7%. The US dollar dropped against the majors once the news was released.
This came after the “hotly watched” FOMC meeting, where Ben Bernanke hinted of QE3 when he said that the Fed was prepared to do more if the economy weakened.
Top News This Week
- Australia: Cash Rate. Tuesday, 1st May,12.30pm. I expect the RBA to cut the rate by 25 basis points to 4%.
- UK: Flash PMI. Tuesday, 1st May, 4.30pm. I expect figures to come in at 51.3 (previous figure was 52.1).
- USA: Non Farm Payrolls. Friday, 4th May, 8.30pm. I expect figures to come in at 170K (previous figure was 120K).
Short AUD/USD at 1.0412
The AUD/USD has had a nice move upwards last week, rising over 200 pips from 1.0245 to 1.0473.
The big news for the Aussie dollar this week is the impending rate cut by the RBA. I expect a reversal to happen once the RBA cuts rates. The rate cut could be either 25 basis points or 50 basis points.
We will go short once prices fall to 1.0412. A stop loss of 64 pips is placed, which is a few pips above the previous high.
We will have two targets on this trade, exiting the final position at 1.2420.
Entry Price = 1.0412
Stop Loss = 1.0476
1st Profit = 1.0348
2nd Profit = 1.0284