Why A Moody’s Credit Rating Cut Doesn’t Matter

Why A Moody’s Credit Rating Cut Doesn’t Matter

Analysts at the global credit rating agency, Moody’s, released a warning to the markets – the US sovereign credit rating may be in for a cut.   Normally, the statement may have warranted an alarming selloff in higher beta currencies like the Aussie, Loonie or even the Euro.

But, price action was relatively muted, all the way through till the close.   The event meant very little to most traders in the market.   Here’s why.

Guest post  by  Richard Lee

On face value, the announcement is grave.   A cut by the global credit agency would make it difficult for US institutions to find or maintain access to global capital and credit.   However, a deeper analysis reveals that the recent statements are a simple followup to threats made in August 2011.  On the heels of a fresh credit ratings cut by S&P to AA+ that month, Moody’s announced that it was placing its own US rating under review.   Moody’s still keeps an Aaa rating on the US.   Ultimately, the recent warning only re-highlights the already growing debt to growth levels in the US – nothing new.

And, we have been here before in regards to US credit ratings downgrades.

Throughout most of the summer in 2011, analysts were calling for a ratings cut in the credit worthiness of the world’s largest economy.   However, experts failed to see that market traders and speculators remain steadfast in their belief that the US continues to be a solid global economy – with one of the deepest and most liquid investment markets.   This notion helped traders toss aside the reality of a credit downgrade in the US the first time around, propelling the Euro higher.

Following the August 5th downgrade by S&P, the Euro advanced by almost 2% against the US in the following weeks.   Now, this isn’t a ringing endorsement to long the Aussie or Euro.   But, given the strength of the US’s reputation and its deep investment offerings, it’s hard to see the real downside risk of the announcement.

Finally, the US economic conditions, the European financial crisis, and Chinese slowdown are overshadowing the announcement.   Moody’s warning does warrant some attention.   However, with much more pressing matters in the market, there is very little that investors and traders can pull from a belated downgrade.   This is especially true when taking into account the potential for a QE3 release and the finalization of the European Stability Mechanism.

Given these reasons, it’s easy to see why the credit announcement fell to the bottom of the list when it came to economic releases on the day.   The absence of any real deviation from what has already been digested in the market will likely support a continuation in the current bearish trend of the US dollar.   The only caveat of course remains to be seen this week when the Federal Reserve is scheduled to make their rate decision.