Daily Currency Update

USD - US Dollar

Following the recent news of Fitch downgrading the US sovereign credit rating from AAA to AA+, markets remain cautious about risk. This downgrade comes after S&P Global's debt rating cut in 2011, leaving only Moody's as the major rating agency still giving the US a top credit rating. Fitch justified its decision by pointing to tax cuts, spending initiatives, and various economic shocks that have contributed to increased deficits. US officials disagreed with the decision, citing the country's strong economic growth and its ability to manage its debt. However, Fitch also highlighted a "steady deterioration" in governance standards related to fiscal and debt matters over the past two decades, with "repeated" debt limit stand-offs and last-minute deals eroding confidence in fiscal management. The impact of this downgrade on Treasurys and the USD has been limited, but the stock market has reacted negatively, prompting investors to sell. The DXY initially dropped after the news but has since regained some ground. However, it might encounter resistance around the 102.50 area as investors assess the implications of the downgrade. Data shows that the US combined deficit (fiscal and current account) is widening, reaching 10.2% of GDP, the widest level since 2012 (excluding the COVID period). These developments could contribute to structural challenges for the USD in the medium to long term and may raise concerns among investors about "de-dollarization" trends, as central bank reserve managers reduce their exposure to the USD. Currently, there is limited significant data being released. The only notable upcoming report for North America is the US ADP jobs report, with a consensus forecast of a 190k increase in jobs. Last month's ADP data indicated a substantial 497k rise in private sector hiring, which was not reflected in the overall slowing trend of the NFP (Non-Farm Payrolls) data.

CAD - Canadian Dollar

The CAD has weakened today, primarily due to external factors and a general decline in risk appetite. Despite the recent increase in crude oil prices to $80/barrel, the CAD hasn't received significant support from this development. Moreover, the relatively smaller difference in yields between the US and Canada has not been given much attention. As a result, the CAD remains undervalued when compared to our fundamental equilibrium estimate of 1.3036. Observe the USD/CAD trends.

EUR - Euro

After the Fitch announcement, the EUR briefly surged above 1.10 in late trade yesterday but has since retraced to the upper 1.09s amid uneventful trading. The current market positioning and uncertainty regarding the ECB policy outlook imply that the EUR might maintain a weaker stance in the short term. However, as the EUR dips to the low/mid 1.09 area, bargain hunters could potentially renew their interest and support the currency.

GBP - British Pound

Following its late gains on Tuesday, the GBP is currently experiencing a slight decline, with progress stalling around the 1.28 level, mirroring the overall USD movement after the Fitch decision. Investors' attention is now turning towards Thursday's BoE decision. There is uncertainty in the markets regarding whether the BoE will implement a 25 or 50 basis points hike tomorrow. Despite this uncertainty, the GBP is expected to receive support on any downward movements.