Standard & Poor's Lifts US Credit Outlook to 'Stable,' USD/JPY Jumps
THE TAKEAWAY: Standard & Poor’s Financial Services upgrades US credit outlook to ‘stable’ from ‘negative’ > Outlook had been negative since August 2011, when S&P downgraded US from ‘AAA’ to ‘AA+’ > USDJPY BULLISH
Standard & Poor’s Financial Services, the only one of the three major US credit rating agencies, announced today that it had upgraded the United States’ sovereign debt outlook from ‘negative’ to ‘stable,’ the first alteration to the world’s largest economy’s credit rating since it lost its esteemed ‘AAA’ rating in August 2011. The downgrade, which prompted even more derisive politics of the US’ fiscal policies, now seems like a distant memory with equity markets trading just short of all-time nominal highs (recall: the Dow Jones Industrial Average had four-consecutive 500-point swings, the first time ever).
Presented below is the rationale for the downgrade, without commentary:
Standard & Poor's Ratings Services today affirmed its 'AA+' long-term and 'A-1+' short-term unsolicited sovereign credit ratings on the United States of America. The outlook on the long-term rating is revised to stable from negative.
Our sovereign credit ratings on the U.S. primarily reflect our view of the strengths of the U.S. economy and monetary system, as well as the U.S. dollar's status as the world's key reserve currency. The ratings also take into account the high level of U.S. external indebtedness; our view of the effectiveness, stability, and predictability of U.S. policymaking and political institutions; and the U.S. fiscal performance.
The U.S. has a high-income economy, with GDP per capita of more than $49,000 in 2012. We expect the trend rate of real per capita GDP growth to run slightly above 1%. Furthermore, we see the U.S. economy as highly diversified and market-oriented, with an adaptable and resilient economic structure, all of which contribute to strong sovereign credit quality.
We believe that the U.S. monetary authorities have both the strong ability and willingness to support sustainable economic growth and to attenuate major economic or financial shocks. As a result, we expect the U.S. dollar to retain its long-established position as the world's leading reserve currency (which contributes to the country's high external indebtedness). We believe the Federal Reserve System has strong control over dollar liquidity conditions given the free-floating U.S. exchange rate regime and as demonstrated by the Fed's timely and effective actions to lessen the impact of major shocks since the Great Recession of 2008/2009. Since 1991, the Fed has kept inflation (measured by CPI) in the 0%-5% range. In addition, the U.S. monetary transmission mechanism benefits from the unparalleled depth of the country's capital markets and the diversification of its financial system, in our opinion.
USDJPY 1-minute Chart: June 10, 2013
Charts Created using Marketscope – prepared by Christopher Vecchio
Following the announcement, the USDJPY rallied from ¥98.60 to as high as 99.09, in what proved to be the pair retaking all of its losses since Thursday’s US cash equity open – a round trip of more than 400-pips in just two trading days (the low on Friday was 94.98). The US Dollar exhibited strength across the board following the announcement, with the EURUSD easing to $1.3195 from 1.3218 and the AUDUSD dropping from $0.9440 to as low as 0.9422, at the time this report was written.
Considered in context of Friday’s NFP report beat, the US Dollar may have retaken short-term momentum that seemed long gone only within the past 48-hours.
--- Written by Christopher Vecchio, Currency Analyst
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