Risk currencies are trading slightly higher this morning thanks to another round of positive U.S. data and Moody’s decision to pass on downgrading Spain to junk status. Housing starts and building permits surged last month with starts rising 15% and permits jumping 11.6% to their highest level in more than 4 years. Low interest rates, rising consumer confidence, increase in the stock market and improvement in job growth have not only made builders more confident but also translated into the strongest housing market performance since 2008. It is hard for anyone to look at this month’s economic reports and not believe that the U.S. economy is finally gaining momentum. While we remain cautious of this being 1 month blip in data, the third round of Quantitative Easing from the Federal Reserve should provide underlying support to the economy, paving the way for a stronger recovery. There’s no question that today’s numbers will drive expectations for an earlier withdrawal of monetary stimulus by the Fed, but this optimism could still be premature.

Meanwhile Moody’s decision last night to reaffirm Spain’s Baa3 rating drove the EUR/USD to a 1 month high, Spanish 10 year bond yields to a 6 month low and Spanish stocks up another 1.5%. By passing on the opportunity to downgrade Spain’s rating to junk, Moody’s removed one major uncertainty from the financial markets and investors around the world have responded positively. Yet despite the milestones reached in the euro and Spanish bonds, the rally in risk currencies including the euro has been modest because the chance of Moody’s downgrading Spain before they requested for a bailout was slim. No rating agency especially Moody’s wants to be responsible for awakening volatility in the financial markets and driving the country to a decision they weren’t prepared for themselves because a downgrade to junk would have certainly driven Spanish yields sharply higher. Investors also realize that Moody’s decision does not remove the risk of a Spanish bailout. The decline in bond yields has bought Spain some additional time which means they could delay ar decision to after the regional elections in October AND the elections in Catalonia in late November. Between the snag in Greek Troika talks and the elimination of major short-term risk for Spain and the euro, we expect this week’s EU Leaders Summit to be another disappointment. In fact, German government sources said this morning that no decisions are expected at the Summit.

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