What are the Implications of Moody’s Possible Downgrading of US Rating?

Market Leader informed

On 13 December 2010 the investor and trader community that has recently calmed down was simply dumbfounded by the announcement made by one of the world’s most trustworthy rating agencies, Moody’s. It forecasted that it might decrease US investment rating in 2012. According to Moody’s analysts, the economic situation in the US is getting worse and ‘is suffering’ because of an extension of tax benefits adopted as a compromise by US Congress upon agreement reached between Republicans and Democrats. What forecasts about the US are behind such rather strange wording of Moody’s?

 

Today’s US rating and Moody’s forecast for ‘tomorrow’. According to Moody’s rating
* the US holds the so-called Aaa level or, simply put, ‘stable growth, positive outlook’;
* 2012 is within sight and might have the outlook downgraded to ‘negative’. This very unpleasant event might result in a rating downgrade within one or, maximum, one and a half years.

 

Why is Moody’s opposing the US so drastically?

 

As the company’s analysts put it this is related to the existing unfavorable situation in this nation’s economy, in particular:
1. For political reasons (diarchy of Democrats and Republicans) the US is incapable of serious reforms in economy and will continue making half-hearted ‘decisions of compromise’ between the two major US parties which will harm business and investment attractiveness of the USA;
* in this contest, unlike his predecessors, current US President Barack Obama, representative of Democratic interests, himself initiated… compromise aimed at real support to the successful development of the country and better wellbeing of the population rather than interests of individual politicians. His Republican opponents in Congress represent a majority which surely affects many crucial decisions made by legislators, including legislative acts. So, no matter how one looks he cannot go without a compromise.
2. Mistakes in the US administration’s estimates as an extension of personal income tax benefits and larger unemployment benefits can trigger a larger US budget deficit and public debt rather than speed up economic growth.
3. Continued reduction of the US revenues especially given Moody’s estimates that the ‘gap’ in the US budget might reach 700 to 900 billion dollars. This amount will ‘turn up’ mainly as a result of reduced budget revenues. Consequently, the United States public debt can hit 73% of Gross Domestic Product.

Analysts of another rating agency, Fitch Ratings, agree with Moody’s:
* they also used to report negative effects of a compromise between Democrats and Republicans for the American economy.
* they believe that if the US forfeits the highest credit rating, Aaa, this will inevitably trigger a reduction in demand for treasury bonds which are currently regarded as the most reliable securities worldwide. This factor, in turn, will lead to increased costs of liabilities for the country.

 

How did Moody’s decision affect foreign exchange rates?

 

Analysts of the Masterforex-V Academy believe that traders and investors reassured by the news that the National Bank of China has changed its mind and won’t raise interest rates started playing for a weaker US dollar in the forex market again. As a result, the American dollar fell against most global currencies. For example, yesterday during the day DXY Index that represents the dollar’s strength vis-à-vis six currencies went down 1% and reached 79.3. The Euro, on the contrary, gained ground against the dollar. In the evening, on 13 December, the European currency added 1.28% to the dollar, thus reaching 1.3397 dollars per Euro.

 

Forecasts: how can the situation in foreign exchange markets evolve?

 

Howard Friend, Chief Analyst at Mig Bank, points out that the dollar doesn't run the risk of a continued fall despite the situation in currency markets resulting from Moody’s announcements. According to them, both developing and developed countries of the world don’t need devaluation of the main global currency and, instead, are interested in devaluing their own national currencies. That’s why central banks of many countries are expected to carry out currency intervention during the current week which will bring the dollar back to the uptrend again.

 

Unlike ‘apocalyptical’ prophecies of Moody’s many economists believe that US economy has good prospects for development. For example, US GDP growth in the last quarter of this year will be 2.6% rather than 2.4% based on a forecast revised up. Next year GDP is expected to grow even more – by 3%. The IMF published data according to which US economy might grow in 2011 even by 3.5-4%.

 

According to experts of the Masterforex-V Forex and Stock Trading Academy:
* favorable tendencies of US economic growth are supported not only by the agreement to extend tax benefits for people and the FED’s program for stimulation of national economy, but also lower unemployment rates;
* and a reduction in the negative trade balance resulting from higher demand for US-produced goods in developing nations.
* a weaker dollar also plays some role in this;
* however, given the Euro’s ‘intention’ to devalue through ‘inhibited’ development of European economy, positive tendencies in the US economy can also ‘slacken’.
* interestingly, according to The Vedomosty which held a survey among economists only 15% of respondents expect a relapse of recession. Remember that 22% of people expressed this view back in October 2010.

 

Experts of the Faculty for Detailed Learning of Masterforex-V Trading Academy advise that there is a correction currently to bearish wave 1.4281-1.2971. EUR/USD is trading in the forex within a W2 range. The maximum this correction can reach is at 76.4% of Fibonacci retracement as there is a protective MF pivot above this level. When broken, it will trigger formation of W2 wave a(C)/(C). The pair’s closest support is near the basis of the developing bullish wave at 1.2971. Its break triggers a D2 Fractal-Zigzag Reversal.

 

EURUSD chart:

 

Maksim Gan (Santyago), Head of the Volume Analysis Department within the Masterforex-V Trading Academy, points out that lower US rating from Moody’s might imply a new wave of the dollar’s fall against its allied pairs from the point of view of the dynamics of the foreign currency market. For example, the Euro grew from 1.32 to 1.34 against the American dollar yesterday alone, and this isn’t a limit at all.

 

EURUSD:

 

In his turn, Vladislav Mitiashyn, an expert at Freshforex, expressed his opinion that Moody’s is an American rating agency. Why would it downgrade its country’s rating?
1. Politically, this plays into the hands of the Republicans who might then accuse Democrats, represented by Obama, of failing to live up to their promises;
2. Economically, the ability to substantially devaluate the dollar and in this way reduce the budget deficit and make exports more competitive.
On the other hand, this is one of levers to influence or, to be more precise, manipulate the currency market. Its rating can be upgraded at any time. It is logical now to downgrade the rating until the economic situation starts looking noticeably better.

 

Market Leader and experts of the Masterforex-V Academy hold a survey for the readers: in your opinion, how do forecasts of such entities as Moody’s affect financial markets and the US?
* countries take Moody’s opinions into account and the US dollar will soon plummet;
* the organization’s forecast is nothing more than a mere assumption.

 

You are free to discuss this article here:   forum for traders and investors