GMI: Downgrade of US Credit Rating Triggers Sharp Decline in Asian Session - Forex Trading Platform

by gmiwaihui0808 on 2011-08-09 16:30:48

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Important Events

Japanese Minister of Finance Yoshihiko Noda stated that a G7 meeting was held on Monday during which the economic issues of the U.S. and Europe were discussed. The G7 agreed to take joint action if the foreign exchange market shows excessive volatility. They will continue to closely monitor fluctuations in the foreign exchange market and, if necessary, the G7 agreed to inject liquidity into the financial system. The G7 statement said they would take all necessary measures to ensure financial stability and economic growth. In terms of the foreign exchange market, they would maintain cooperation and continue to stay in contact over the next few weeks, ready to act whenever necessary. They welcomed the statements made by the European Central Bank and agreed to take joint measures to ensure liquidity. They support market-determined exchange rates as excessive volatility in the foreign exchange market is detrimental to economic growth and financial stability.

Moody's confirmed the U.S.'s AAA rating. Moody's expects the U.S. to further implement fiscal consolidation measures which will support the maintenance of its high rating. If the U.S.'s fiscal or economic outlook significantly weakens, Moody's will downgrade the U.S.'s sovereign credit rating before 2013. However, Moody's also stated that the newly reached debt ceiling in the U.S. has brought hope for reducing fiscal deficits.

President Obama gave a speech regarding the downgrade of the U.S.'s sovereign rating by Standard & Poor's. He stated that regardless of what a certain rating agency says, the U.S. is now and will always be a country with an AAA sovereign rating. He criticized S&P's negative outlook on the U.S., believing that without needing comments from a rating agency, the U.S. knows and is making fiscal adjustments to help the U.S. economy recover. Obama mentioned that the U.S. should make adjustments in medical insurance and taxation of the wealthy to narrow the U.S.'s budget deficit. He urged Congress to extend the reduction of payroll taxes and unemployment benefits to aid in the development of the U.S. economy.

Currency

Euro/USD

Last week, S&P's downgrade of the U.S.'s rating drove the Euro/USD higher. During early Asian session trading, it once touched 1.4429 before retreating. European stock markets across the board expanded their losses to about 2%, causing market sentiment to come under pressure again. The Euro/USD successively fell below 1.4300 and 1.4200, touching 1.4128 during the early U.S. session before rebounding above 1.4200. It then retreated again later in the session to consolidate below 1.4200.

Short-term consolidation; look to sell on rallies below 1.4250 with a target price below 1.4150 and stop-loss at 1.4280.

USD/JPY

On Friday, S&P downgraded the U.S.'s AAA rating, leading to a gap opening lower for the USD/JPY on Monday. After a small rebound, it continued to decline. Japanese Minister of Finance Yoshihiko Noda stated that the G7 held a telephone conference on Monday where they agreed to take joint action if necessary to ensure economic growth and financial stability. Additionally, they aim to prevent excessive volatility in the foreign exchange market. The close was below 77.50.

Short-term cautious bearish view; look to buy on dips within the 77.00-76.30 range while waiting for another intervention by the Japanese government.

GBP/USD

GBP/USD retreated after reaching a high of 1.6475 in the early session. The downgrade of the U.S.'s rating triggered a sharp drop in Asian stock markets, increasing risk aversion and pressuring the exchange rate. During the early U.S. session, GBP/USD broke below 1.6300, touching 1.6296 before rebounding to 1.6378. It then fell again in the afternoon.

Short-term cautious bearish view; look to sell on rallies above 1.6300 with a target price of 1.6240 and stop-loss at 1.6330.

Commodity Futures

Gold

Gold continues to hold its leading position in global financial markets. The surge in gold prices was directly driven by S&P's downgrade of the U.S.'s long-term sovereign credit rating. The current market expectation for the third round of quantitative easing monetary policy in the U.S. (QE3) is unprecedentedly strong. Once QE3 is introduced, global liquidity will inevitably increase, leading to greater inflationary pressures. As gold is the measure of global liquidity, the introduction of QE3 will continue to drive gold prices to new highs. Currently, gold is in a frenzied rally. Continued upward movement will inevitably face some pullback, but no significant signs of a major correction in gold have yet appeared.

Stocks

The Nikkei index closed down 2.18% at 9097.56 points.

The UK FT100 closed down 3.39% at 5068.95 points.

The German DAX index closed down 5.02% at 5923.27 points.

The French CAC index closed down 4.68% at 3125.19 points.

On the evening of last Friday, Standard & Poor's downgraded the U.S.'s credit rating from AAA to AA+ with a negative outlook. S&P indicated that the U.S. political system has become unstable and that the size of the deficit reduction agreement reached last week was not large enough. S&P made an unprecedented downgrade of the U.S.'s credit rating, causing panic among investors and resulting in a substantial collapse of global stock markets on Monday. Following S&P's downgrade of the U.S.'s credit rating, another major rating agency, Moody's, also warned that if the U.S. does not continue to cut its deficit, Moody's will also downgrade the U.S.'s credit rating. By the close, the Dow Jones Industrial Average fell 634.76 points, closing at 10,809.85, a decline of 5.55%; the Nasdaq Composite Index fell 174.72 points, closing at 2,357.69, a decline of 6.90%; the S&P 500 Index fell 79.92 points, closing at 1,119.46, a decline of 6.66%.

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