What is a Credit Rating?
Like any other security, investors look at credit ratings 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 typically have low credit ratings. 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 to borrow the same amount of money from markets.
Do credit rating decisions directly affect my favorite currency pairs?
Since credit ratings factor significantly in investors’ analyses, any major announcement from major credit rating agencies can directly affect your currency trades.
Please note 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.