Aussie Falls After China's Debt Rating Downgrade Jolts Investors

  • Downgrade jolted markets, Aussie dollar acts as proxy: Westpac
  • Macro funds positioning before Fed seen bidding dollar-yen

Why Moody's Downgraded China to A1

The Australian dollar fell and the yen pared losses against the U.S. currency after Moody’s Investors Service cut its rating on China’s debt for the first time in almost three decades.

The Aussie was chased lower by clients on electronic platforms, said an Asia-based trader. China is Australia’s biggest trading partner. The yuan declined and default risk increased after Moody’s lowered the country’s rating to A1 from Aa3, citing the likelihood of a “material rise” in economy-wide debt and the burden that will place on the state’s finances.

“The downgrade jolted markets and the Australian dollar again showed itself to be the preferred FX proxy for China’s economy,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “The currency’s fall is probably driven by fear Moody’s could be right that China’s heavy indebtedness threatens its medium-term growth prospects and thus demand for commodities.”

Even though Moody’s had a negative outlook for its previous rating on China, the downgrade is a surprise and will weigh on sentiment for the Aussie in the short-term, said Peter Dragicevich, a foreign exchange strategist at Nomura Singapore Ltd. 

  • AUD/USD slides 0.4% to 0.7450
  • USD/JPY +0.1% to 111.91 after rising to as high as 111.99 earlier in the session
    • Leveraged shorts front-running option related offers adjacent to 112.00 strikes have added to same in wake of downgrade, according to an Asia-based FX trader
    • Says macro funds positioning ahead of Fed welcome the move as a chance to buy the dip, bids seen near 111.50
  • Treasury 10-year yield halts four-day climb to 2.28%
    • Fed Bank of Philadelphia President Patrick Harker said June “is a distinct possibility” for the U.S. central bank’s second interest-rate increase of 2017
  • Iron ore traded on Dalian commodity exchange falls 5% to 465 yuan/MT
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