Spanish Downgrade & Chinese Trade Deficit - Moody's downgrade of Spain to Aa2 from Aa1 with a negative outlook took the floor from underneath the Euro causing it to tumble towards the 1.38 level where bids emerged from foreign sovereigns. The possibility of a European Central Bank rate hike next month is containing a further slide in the Euro for now, but if the Euro closes below 1.38 this week then more losses should be expected. The downgrade served as a reminder to investors that the euro zone's debt crisis is far from over. In the UK, the GBP moved lower after the Bank of England kept its benchmark interest rate at a record low and left its asset-purchase program unchanged. In Asia, the central bank of New Zealand cut rates by 50 bps while the central bank of South Korea raised rates by 25bps. Most of the banks in Asia are raising rates to battle inflation but New Zealand choose to cut in order to deal with the massive fallout of last month's devastating earthquake. But the big news out of Asia was that China had a trade deficit not a surplus. The $7.3 bln deficit is the largest monthly trade deficit in seven years, which was worse than the $5 bln that was expected. So does this data show that the increases in the bank reserve ratio and lending rates have worked to slow down the Chinese economy or did the lunar New Year skew the data? This news combined with the Spanish downgrade have put a firm bid under the USD today. News that US jobless claims rose more than expected and that the US trade deficit widened more than expected only caused a slight give back in the currency this morning. In Canada, the CAD came off on news that Canada barely eked out a trade surplus ($0.12 billion) for the month of January. Also, December's surplus was revised down by almost half. The CAD was already down before the news as the price of oil slid to US$102.67 a barrel and due to the risk off trade due to the Spanish downgrade and Chinese trade deficit.
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