“AA+” Rating

Do you happen to know that about $6.77 trillion has been

wiped off the value of global equity markets after S&P downgraded

U.S. debt for the first time?

It is the well known thing that reports and statements given by important politicians

and economists have great impact on currency market moves. Anyone can talk about it

hours, but it can be more interesting to see the real trading days in terms of news.

That is why we decided to share the Forex news with you having not only facts in store

but real figures.

Let me talk today about the following:

Standard & Poor’s rating agency reduced

the long-term sovereign credit rating of the United

States from “AAA” to ”AA+” on August 5.

In fact, it is somewhere between very strong

and extremely strong capacity to meet the financial

commitments. And despite the fact that the US was

removed from their CreditWatch list, the rating

outlook remained “negative”.

None of the two other biggest credit rating

agencies (Fitch Ratings and Moody’s) followed S&P. They still granted the United

States their highest ratings possible (“AAA” and ”Aaa”).

What are these rating agencies?

Moody's Corporation (NYSE: MCO) is the holding company for Moody's Analytics and

Moody's Investors Service, a credit rating agency which performs international financial

research and analysis on commercial and government entities. The company also ranks

the credit-worthiness of borrowers using a standardized ratings scale. It is one of the Big

Three credit rating agencies and has a 40% share of the world market, as does its main

rival, Standard & Poor's; Fitch Ratings has a smaller

share.http://en.wikipedia.org/wiki/Standard_%26_Poor%27s - cite_note-1

Standard & Poor's (S&P) is a United States-based financial services company. It

publishes financial research and analysis on stocks and bonds.

The Fitch Group is a majority-owned subsidiary of FIMALAC, headquartered in Paris.

Fitch Ratings, Fitch Solutions and Algorithmics, are part of the Fitch Group.

Fitch Ratings positions itself as a global rating agency dedicated to providing value

beyond the rating through independent and prospective credit opinions, research and

data. Fitch Ratings is the smallest of the "big three", covering a more limited share of the

market than S&P and Moody's, though it has grown with acquisitions and frequently

positions itself as a "tie-breaker" when the other two agencies have ratings similar, but

not equal, in scale.

There is always a difficulty in forecasting

the currencies future.

But this is the first rating downgrade in US

history, leaving the analysts without precedents

to research.

In addition, the effect of such a downgrade

on the US currency may be dual: it may signal the approaching economic recession, thus

raising the demand for safe-have currencies, or it may signal only weakness in the US

economy and more precisely in the US debt papers, driving the demand off the US

Treasury notes.

Following that US credit rating downgrade many of the Forex traders wondered how

the currencies would react.

Under these conditions, it is more prudent to analyze the possible behavior

of the separate currency pairs — EUR/USD, GBP/USD, USD/JPY and USD/CHF, because

the outcomes for each of them may be quite different.

EUR/USD

The euro is also burdened by the debt and fiscal

troubles that have led to credit rating downgrades

of some Eurozone states. Fortunately for the euro, there

is no unified credit rating for the Eurozone. Nevertheless,

the euro may get hit hard from the US downgrade,

as the traders might get scared away by the possible new

series of rating reductions in Europe. If the news

for the United States are bad, the news for the Eurozone aren’t any better. In addition,

the technical charts show that the EUR/USD currency pair is still consolidating. All this

suggests a very uncertain future for the Forex pair with a high chance for a range-bound

market.

GBP/USD

While the British pound is closely tied to situation

in the Eurozone, it traded more robustly than the euro

during the last several weeks. Although the UK

economy is currently characterized by a very slow

growth combined with a soaring inflation,

the government takes serious measures to decrease

the public debt and there is a great confidence in their

actions among the consumers and business.

The United Kingdom still holds the highest S&P rating — “AAA”.

On the other hand, the US rating cut opens up a possibility for the downgrades

of the other developed countries, which could feel safe earlier. The United Kingdom is not

an exception. But even if that happens, it won’t be too soon, so, fundamentally,

the pound remains stronger than the euro and the US dollar.

USD/JPY

USD/JPY analysis is complicated with another factor

(which is also an issue for the Swiss franc) —

the currency intervention by the Bank of Japan.

There’s also a yen-positive factor though. It’s

in a long-term bullish trend, which seems to be

unstoppable, despite all the rhetoric from

the Japanese financial authorities. In spite

of the previous currency interventions, the yen has always managed to recover quickly.

USD/CHF

Swiss franc is ridden with the same worm

as the Japanese yen — the intervention

of the central bank. But in case of franc,

the effect of the intervention was minimal

and there’s a high amount of probability that

all the Swiss National Bank‘s work to hold down the national currency’s appreciation will

be futile. Moreover, the franc has two advantages: it’s a safe-haven currency — probably

the most popular one nowadays and it’s also often bought as an alternative to the euro

when the traders are demonstrating risk-aversion.

CHF looks to be the only currency that is definitely going to benefit from the S&P

rating action.

Real trading news for the last week

August, 8 - The trading week begun with fall of EURUSD.

The euro slipped against the dollar after Standard & Poor’s cut the US credit rating.

S&P downgraded the US rating to AA+ on August 5 and left the outlook on ”negative”,

signaling that the rating can be further downgraded to AA. Two other major rating

agencies, Moody’s Investors Service and Fitch Ratings, maintained their AAA credit

ratings for the US on August 2 as American politician resolved their dispute about

the nation’s debt ceiling, but these rating agencies also signaled about the possible

downgrades.

EUR/USD posted a sharp drop from 1.4417 to 1.4247 as of 9:52 GMT.

August, 9 - Pound Dropped with Higher Trade Deficit

The Great Britain pound dropped after macroeconomic data provided that day about

the unexpected growth of trade balance deficit and decline of manufacturing.

The UK trade balance deficit widened to £8.9 billion in June from £8.5 billion in May.

Traders hoped for decrease of the deficit to £8.2 billion. Manufacturing production

declined with the annual rate of 0.4 percent in June. The contraction followed

the advance by 1.8 percent in the month before. Market analysts predicted an increase

by 0.3 percent.

Riots in London and other cities of Britain lead to massive damage to property and left

one person dead. Several hundred was arrested.

GBP/USD was little changed at 1.6302 as of 23:58 GMT after opening at 1.6315, rising

as high as 1.6409 and falling as low as 1.6175. EUR/GBP jumped from 0.8688 to 0.8804

and GBP/JPY slipped from 126.82 to 124.49 before trading at 125.74.

August, 10 – Dollar is affected by Federal Plans

The US dollar slumped against some other currencies, including the euro, the yen

and the franc, after the Federal Reserve kept its key Federal Fund rate near zero

and signaled that it may keep interest rates exceptionally low till mid-2013.

The Federal Open Market Committee said in its statement that “economic growth so

far this year has been considerably slower than the Committee had expected”. The FOMC

outlined the current problems of the US economy, such as ”a deterioration in overall

labor market conditions in recent months”, growing unemployment and depressed

housing sector. As a result the Committee announced:

To promote the ongoing economic recovery and to help ensure that inflation, over

time, is at levels consistent with its mandate, the Committee decided today to keep

the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently

anticipates that economic conditions–including low rates of resource utilization

and a subdued outlook for inflation over the medium run–are likely to warrant

exceptionally low levels for the federal funds rate at least through mid-2013.

The euro reacted favorably to the statement at first, but erased gains later. The drop

was short-lived, though, and currently EUR/USD shows a strong rally. The Swiss franc

reached yet another record against the greenback before retreating. The franc moved

down against the dollar, but it’s likely just a temporary correction.

EUR/USD surged from 1.4176 to 1.4339 as of 20:21 GMT today. USD/JPY dropped

from 77.74 to 77.03. USD/CHF slumped from 0.7545 to 0.7197 and reached earlier its

new all-time low of 0.7083.

August, 11 – Franc Plunges Heavily on Prospects of Euro-Peg

The Swiss franc slumped today against all major currencies as Swiss National Bank

Vice President Thomas Jordan suggested that a short-term peg of the nation’s currency

to the euro could be legal.

The SNB was attempting to weaken the Swiss currency for several years. So far such

attempts were futile. There is a difference this time, though, as a peg wouldn’t have just

one-time effect as the previous interventions, but would put a continuous pressure

on the franc. It looks like Switzerland’s central bank is ready for unconventional

measures and such measures can help the bank to achieve its goals for making

the franc’s strength less threatening to the country’s economy.

The potential weakening of the Swiss franc can pose an interesting question (in case

the SNB would be able to achieve such weakening, of course): what currency can be

considered a safe haven? The yen is also under pressure of interventions, while the dollar

doesn’t look that safe. Perhaps investors, interested in safety, would shun the Forex

market altogether.

USD/CHF surged from 0.7263 to the daily high of 0.7687 today before trading near

0.7617 as of 21:01 GMT. EUR/CHF climbed from 1.0296 to 1.0843. CHF/JPY slumped

from 105.72 to 100.88.

August, 12 – Pound reacted positively to the news of George Osborne

UK Chancellor of the Exchequer George Osborne rejected demands of the opposition

to reconsider the spending cuts that are biggest since World War II. The Great Britain

pound reacted positively to the news.

Opposition to the spending cuts is strengthening as riots and looting in London

intensifies and spreads to other cities. Yet Britain’s government remains firm in their

intention to maintain the record cuts. Osborne explained that the credibility of the UK

austerity measures helped in attracting investors to government bonds, aiding

the nation’s economy. Prime Minister David Cameron claimed that the planned decrease

of expenditure on the police can be performed “without any reductions in visible

policing”.

The sterling gained against the euro, the dollar and the yen on yesterday’s trading

session. The UK currency slid against the greenback as today’s trading session has

started. The pound attempts to hold against the yen, but slowly gives up gains. Against

the euro Britain’s currency rallied for three sessions and still hasn’t showed signs

of weakening.

GBP/USD advanced from 1.6132 to 1.6237 and retreated to 1.6212 as of 1:34 GMT

today. GBP/JPY rallied from 123.95 to 124.72 on the previous trading session

and attempts to hold at this today. Meanwhile, EUR/GBP fell from 0.8770 to 0.8750

today in the third straight session of declines.

In conclusion

This trading week is almost over. So what’s next?

We are waiting for the market stabilization and are interested in the prices for Gold

and Oil. But we can never predict the market.

And as you have noticed these days have been rather hard, and the next week may

also have something in store.

Now, I hope you would not only see the movement of the price but also the reason

behind it.

by : Rita Lasker