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EUR/AUD Slumps to Record Low After S&P Hurts Outlook for Europe

January 14, 2012 at 5:02 by Vladimir Vyun

Australian dollar billsThe Australian dollar jumped against the euro after Standard & Poor’s harmed sentiment about Europe by cutting credit ratings of European countries. The Australian currency managed to erase losses against the US dollar and the Japanese yen despite the resulting pessimism.

S&P announced yesterday:

We have lowered the long-term ratings on Cyprus, Italy, Portugal, and Spain by two notches; lowered the long-term ratings on Austria, France, Malta, Slovakia, and Slovenia, by one notch; and affirmed the long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands.

The rating agency explained its decision by the following reasons:

Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone. In our view, these stresses include: (1) tightening credit conditions, (2) an increase in risk premiums for a widening group of eurozone issuers, (3) a simultaneous attempt to delever by governments and households, (4) weakening economic growth prospects, and (5) an open and prolonged dispute among European policymakers over the proper approach to address challenges.

Markets came crashing down after the announcement. The Thomson Reuters/Jefferies CRB Index of commodities lost 0.8 percent. The Standard & Poor’s 500 Index slipped 1.1 percent and the MSCI World Index of shares dropped 0.9 percent. It’s not surprising that the euro fell against other currencies, including the Australian one, but it was quite unexpected that the Aussie itself managed to hold against safer currencies.

EUR/AUD was down from 1.2397 to 1.2272 on the previous trading session, reaching 1.2262 intraday — the record low price. AUD/USD closed at 1.0322, near the opening of 1.0332, while intraday it slumped to 1.0231. AUD/JPY fell from 79.30 to 78.76, but rebounded to close at 79.44.

If you have any questions, comments or opinions regarding the Australian Dollar, feel free to post them using the commentary form below.

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