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History repeats itself. But the world is changing, so the financial markets' reaction to the same events can be radically different. In 2011, S&P agency downgraded the credit rating of the United States, leading to a drop in Treasury bond yields, a weakening U.S. dollar, and a surge in gold prices. In 2023, Fitch followed the same path. It cited management erosion and a growing budget deficit relative to GDP. As a result, the U.S. moved from the most elite club of creditors to a less elite one. However, the market reaction turned out to be completely opposite.
Investors shrugged and wondered what makes Canada or Luxembourg better creditors than the U.S.? There is no panic like 12 years ago, even though risky assets are being sold off. In the Forex market, there is an opinion that it wasn't the rating downgrade that scared the markets but the anticipated Fitch recession in the Q4 2023–Q1 2024. However, there is no storm on the horizon. It is possible that investors completely ignored the movement of the U.S. from the AAA basket to the AA+ basket, and the decline in stock indices is due to strong U.S. statistics and information about massive Treasury auctions.
Fitch Credit Rating
By the week of August 11, the Department of Treasury intends to issue long-term bonds in the amount of $103 billion. This circumstance diverts money from the secondary market of debt securities to the primary market and contributes to the rise in yields of 10-year Treasury bonds to the highest levels since the fall of 2022. Such a huge figure is associated with the need for the Treasury to finance its old obligations, expenses of which have increased due to the Federal Reserve's most aggressive monetary tightening cycle in decades. At the same time, the government reported lower-than-expected tax revenues.
Investors are impressed with the 324,000 increase in private sector employment from ADP. The July figure exceeded the forecasts of any Bloomberg expert and signals the labor market's resilience. The stronger the U.S. economy, the less likely the Federal Reserve's dovish pivot in March or May 2024, which is good news for the U.S. dollar.
U.S. Debt Servicing Expenses Dynamics
Thus, we observe a completely opposite market reaction to the news of the U.S. credit rating downgrade from the highest level by one notch. Unlike the events of 2011, in August 2023, the U.S. dollar is strengthening, yields of Treasury bonds are rising, and gold is falling. Markets don't like patterns. They constantly change along with the economy. It's fascinating to watch them.
Technically, on the daily chart of EUR/USD, after shooting upwards due to the surprise from Fitch, the main currency pair did what it was supposed to do—fall. Its downward campaign is supported by the implementation of the combination of reversal patterns "Three Indians" and "1-2-3". The previously mentioned target levels at 1.089 and 1.084 are getting closer. We are holding short positions and occasionally adding to them on pullbacks.
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