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By Neal Gilbert, FX360.com

A slow news day in the US means that most traders are paying more attention to stgelopments out of the Eurozone than anything else today, and so far, they haven’t been disappointed. Fitch, one of the big three rating agencies, has downgraded 18 Spanish banks causing a spike down in risk currencies, but it will probably be short lived. Pretty much everyone already knows that Spanish banks needed to be bailed out to the tune of 100 billion euros, so a rating agency downgrading a phalanx of them shouldn’t surprise anyone. Plus, the market is due for a bit of a rally based on profit taking and the aptly named “dead cat bounce” that we often see after extreme moves down like yesterday’s.

Rating agencies are not the only concern for investors out there though as European bond yields are continuing their ascension. The two most disconcerting values are the 10-year bond yields of Italian and Spanish governments. Spain crept up above the 6.8% threshold, while Italy breached 6.2%. It is often cited that 7% is where the interest load becomes unbearable for countries the size of Italy and Spain, and the Spanish bailout hasn’t deterred bond vigilantes from targeting these countries. Last time yields started to reach these levels, the ECB released plans for their second LTRO back in February, which restored order to those yields. Interestingly, the first LTRO was implemented in October 2011, four months before the second derivation. Since the second LTRO was implemented approximately four months ago, is history doomed to repeat itself again?

The rest of the day will most likely be dependent upon equity flows in the US stock market. If stocks rise, then the EUR/USD and other risk related investments probably will as well. Daniel Tarullo, a FOMC voting member, will be giving a speech later this morning as well. Being that he leans toward the dovish side of the scale, any mention he makes of QE3 could create some positive vibes, leading toward a risk rally. However, if he dismisses the idea, the bears may rule the day.


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