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Risk appetite started on shaky footing on the back of an explosion in the U.K., but the tides soon turned in favor of higher-yielding currencies despite a lack of economic catalysts.

  • Fonterra raised its milk price forecast from $6/kg to $6.15/kg this year
  • NZ trade surplus hits 578M NZD vs. 268M NZD expected, 277M NZD in March
  • AU MI leading index dips by 0.1% vs. 0.1% uptick in March
  • AU construction work done (q/q) down by 0.7% vs. 0.5% decline expected, 0.6% growth in Q4 2016
  • Moody’s downgrades China’s credit rating
  • Terror threat in U.K. raised from “severe” to “critical”

Major Events/Reports:

Moody’s downgrades China

The biggest story of the hour is credit ratings agency Moody’s downgrading China’s sovereign credit rating – a first since 1989 – from A1 to AA3 and switching its outlook from “stable” to “negative.”

According to Moody’s, “The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.

The credit ratings agency added that “While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.

The downgrade comes at a time when the government is trying to strike a balance between fighting financial risks while still supporting economic growth.

Not surprisingly, China’s Finance Ministry wasn’t a fan of the downgrade, saying that “Moody’s has overestimated the difficulties faced by China’s economy and underestimated the government’s ability to deepen reforms.”

In any case, the Shanghai Index ended the session 0.36% lower, while Hong Kong’s Hang Seng also dipped by 0.11%.

U.K. raises terror threat level

For the first time in ten years, the U.K. has raised its terrorism threat level from “severe” to “critical,” the highest of the country’s threat levels.

In a speech, Prime Minister Theresa May warned that they can’t discount the possibility that the attacker had an accomplice and that another attack may be “imminent.”

If you recall, the Manchester Arena was rocked by an explosion yesterday, killing at least 22 and injuring more than 50. ISIS has claimed responsibility for the attack though it has yet to offer evidence.

Up to 5,000 soldiers are expected to be deployed in the streets, while police officers guarding key sites will be replaced by armed military officers.

Major Market Mover(s):

AUD

The Aussie was the biggest loser during the trading session, as bears rushed in after Moody’s downgraded China’s credit rating.

AUD/USD is down by 32 pips (-0.43%) to .7447, AUD/JPY dropped by 28 pips (-0.34%) to 83.32, and AUD/NZD fell by 39 pips (-0.37%) to 1.0638.

GBP

The pound weathered the U.K. raising its terror threat level, and actually gained pips against its major counterparts. One possible explanation is that Asian session traders are just taking profits from yesterday’s selloff.

GBP/USD is up by 5 pips (+0.04%) to 1.2970, GBP/JPY jumped by 16 pips (+0.11%) to 145.12, and EUR/GBP slipped from a session high of .8633 to trade at 8621.

Watch Out For:

  • 6:00 am GMT: GfK German consumer climate expected to remain at 10.2
  • 12:45 pm GMT: Mario Draghi to make a speech in Madrid