HOTLINE: Western brokers waking up to China’s role in market after Dagong downgrades USA

As broadly expected, US politicians passed a last-minute, temporary deal on Wednesday to raise the country’s borrowing limit and restart public services, and the markets reacted with a yawn.

As broadly expected, US politicians passed a last-minute, temporary deal on Wednesday to raise the country’s borrowing limit and restart public services, and the markets reacted with a yawn.

Copper moved higher in tandem with equities, the dollar was sold and Treasury yields were bid, but there were no major swings after the temporary, widely anticipated result.

But when Dagong, a Chinese ratings agency, announced on Thursday that it was downgrading US debt, it forced a 0.44% jump in the euro-dollar, the world’s most actively traded currency pair, over a 20-minute period. 

Gold prices spiked massively after Dagong's announcement at 3pm Shanghai time, and held those gains throughout the day. The discretionary money that is left in copper followed the dollar's move, giving the red metal a modest lift too.

For brokers in Europe and the USA, it made for a busier morning than they had expected, and forced some cursory research into what Dagong is.

But for brokers in Asia, the credit agency’s message had significance far beyond the knee-jerk intraday move in the dollar and gold it inspired.

“If you were a broker in the USA and I told you two years ago that a Chinese ratings agency would move the dollar like that, you wouldn’t have believed me. In fact, you wouldn’t have believed me 20 minutes before it happened,” a broker in Hong Kong told Hotline.

“This isn’t so much about a significant price move as it is about a significant change in the way we have to think about markets. Next time Dagong downgrades, I’ll be watching,” the broker said.

Register on the Dagong website here.

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