Like in any other security, investors look at credit rating to determine a debt issuer’s ability to repay a loan. In forex trading, credit ratings are mostly referred to as sovereign debt, or bonds, issued by governments to finance public projects and services. We usually see credit ratings expressed in letters like AAA, BB+, or D.
Since sovereign debt is usually denominated in foreign currencies, countries with unstable exchange rates or low economic growth usually have low credit ratings as they present an additional risk of not being able to pay back their investors. As a result, countries with low credit ratings usually have to pay more than their high-rating counterparts in order to borrow the same amount of money from markets.
Do credit rating decisions directly affect my favorite currency pairs?
Since credit ratings factor greatly in investors’ analyses, any major announcement from major credit rating agencies can directly affect your currency trades.
Take note that the fact that not all credit rating agencies are in sync with their assessments suggests that no single rating agency can present the whole picture when it comes to analyzing sovereign debts.
Vincent Nyagaka is a Professional Trader, Analyst &. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Checkout Vincent’s Professional Trading Course here.