Moodys US Downgrade Chatter, German Decision Awaited

Moodys said it will lower the United States credit rating unless budget negotiations but the country on a path to a lower debt-to-GDP ratio. The headlines sparked a rout on the US dollar; the Australian dollar was the top performer. Japanese machine orders and Australian housing starts are the highlights in Asia. A new Premium Insights from Ashraf ahead of the Wednesday German Court decision and Thursdays FOMC decision is due out at approximately 18:30 EST, 23:30 BST (London Time).

The Moodys comment is not a surprise but it pushed the dollar through some key levels, sparking further declines. The euro rose above the 200-day moving average and USD/JPY hit a 3-month low after breaking the July lows. Cable climbed to 1.6086 the highest since May.

We see the news as a sign of the unwillingness of the market to hold US dollars ahead of the Fed decision. Market participants are looking for opportunities to establish short USD positions. If Bernanke does not announce QE3, the reversal will be large and rapid.

The Australian dollar benefitted from comments from Chinese Premier Wen, who promised to boost growth without offering details. Industrial metals prices have also surged in the past week, pointing to a rebound in the global economy.

The lone data point was the US trade deficit for July. Imports and exports were both lower and the deficit was $42B compared to $44B expected. The trade data is a negative for global growth but the numbers are from July.

In the upcoming session, Australian Q2 dwelling starts are a highlight at 2130 GMT. Starts are expected 2.0% after a 12.6% plunge in the first quarter.

Later, at 2350 GMT, Japanese machine orders are expected to fall 3.6% y/y in a show of the slowing domestic and global economy. At the same time, the July tertiary index is expected down 0.5% m/m. Inflation also gives the BOJ headway room for more QE; the CGPI is expected down 1.9% y/y in August.

The German Constitutional court decision is at 0800 GMT. The ESM is expected get approval but conditions limiting German contributions to perhaps 190B euros, which would be equivalent to Germanys size in the Eurozone. Such an outcome will weaken EUR substantially.

-AB