Evaluating a Nation’s Creditworthiness

In the world of currency trading, a nation’s creditworthiness is fundamental to a successful investment. In addition, a currency trader must consider monetary policy and interest rate developments. Monetary policy is the set of policy actions that central banks use to achieve their legal mandates. These policies are usually made with the aim of promoting price stability and employment.

In order to properly evaluate a nation’s creditworthiness, an investor must observe the following credit risk measures. With regard to credit risk measures, using the Forex market’s news reports and economic commentaries to make appropriate determinations.

Evaluating a Nation’s Creditworthiness

Credit Ratings

The debt ratings broadcast by Moody’s, Standard & Poor’s (S&P), and Fitch still affect many investors decisions. The credit rating agencies will commonly issue an announcement of the country’s debt rating being under review just before a ratings change is made. Along with the announcement, an opinion of the review is also offered. The opinion is a significant to investors.

Yield Spreads

These demonstrate the difference between the interest rates of one government’s bonds in comparison to an obviously safer country’s bonds. The wider the spread or difference, the greater the credit concerns should be.

Credit Default Swaps (CDS)

These are insurance policies in the event the seller must default on a bond. Rising CDS rates mean augmenting credit risk while falling CDS rates, expressed in basis points, signifies lesser concerns.

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Debt Auction Results

Governments borrow money through scheduled auctions or issuances. The government attempts to sell its debt to global investors. The more indirect bidders insinuates confidence in the currency and government whereas a low turnout reflects a lack of confidence.