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Will S&P’s China Downgrade Matter?

The US dollar gave back some of its gains on Thursday but risks in China are rising after S&P downgraded its sovereign rating to A+ from AA-. The pound was the top performer while the Australian dollar lagged. Japan is on holiday. British PM Theresa May’s speech about the EU on Friday followed by German elections on Sunday. A new Premium video was posted following the post-Fed moves in FX, indices and metals.

China undoubtedly has a debt problem but it’s had one for years without causing any real spillovers or consequences. It’s one of those looming problems that’s impossible to ignore but equally impossible to bet against.

A rarely-talked-about driver of western growth in the past 30 years is credit. It’s a magical wealth creator until exhausted and that’s what happened in the US financial crisis. China has been endlessly extending credit to companies and individuals and it’s helped to pull hundreds of millions out of poverty.

So far bumps in the road have been handled by central planners but virtually everyone believes there will one day be a true hiccup. Whether that’s next month or next decade is the impossible question to answer. Other catalysts are needed.

When trouble erupts, it’s not likely to be from a downgrade or even a shift in the market. Like we saw two years ago, it’s likely to come on some kind of change in policy. For every percentage point higher in growth or incremental rise in credit, the stakes are raised for regulators and economic planners.

That’s why we will be watching the once-every-five years Congress that opens on Oct 18. Murmurs from China are that a theme will be stability. That’s something we’ve heard many times before and lends itself to mitigating problems, rather than tackling them.

In other news, the USD rally failed to follow through Thursday. That was despite a fall in initial jobless claims to 259K from 302K in the aftermath of Harvey. The Philly Fed also improved to 23.8 from 17.1.

Perhaps the most-telling indicator was eurozone consumer confidence. It rose to -1.2 from -1.5 – that’s the best since 2001. After falling as low as 1.1853 Wednesday, the euro slowly climbed to 1.1938.

Expect a quiet wind down to the week in Asia with Japan on holiday.

Ashraf Laidi
Ashraf Laidihttp://ashraflaidi.com/
Ashraf Laidi is an independent strategist and trader, founder of Intermarket Strategy Ltd and author of "Currency Trading & Intermarket Analysis". He is the former chief global strategist at City Index / FX Solutions, where he focused on foreign exchange and global macro developments pertaining to central bank policies, sovereign debt and intermarket dynamics. Ashraf had also served as Chief Strategist at CMC Markets, where he headed a global team of analysts and led seminars and trainings in four continents. His insights on currencies and commodities won him several #1 rankings with FXWeek and Reuters. Prior to CMC Markets, Laidi monitored the performance of a multi-FX portfolio at the United Nations, assessed sovereign and project investment risk with Hagler Bailly and the World Bank, and analyzed emerging market bonds at Reuters. Laidi also created the first 24-hour currency web site for traders and researchers alike on the eve of the creation of the euro. Laidi's analysis of currency markets stand out based on his distinct style in bridging the fundamental and technical aspects of the markets. Laidi regularly appears on CNBC TV (US, Europe, Arabia and Asia/Pacific), Bloomberg TV (US, Asia/Pacific, France and Spain), BNN, PBSs Nightly Business Report, and BBC. His insights also appear in the Financial Times, the Wall Street Journal and Barrons. He has given numerous interviews and lectures in Arabic, French, and to audiences spanning from Canada, Central America and Asia/Pacific.

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