Credit rating is an assessment of the credit risk of a prospective debtor. Investors look at credit ratings to determine a debt issuer’s ability to repay a loan. In forex trading, credit ratings mainly apply to sovereign debt, or bonds that are issued by governments for financing public projects and services. Credit ratings are expressed in letters such as AAA, BB+, or D.
Because sovereign debt is usually denominated in foreign currencies, countries with unstable exchange rates or low economic growth have low credit ratings while countries with high economic growth rate and stable exchange rates have relatively higher credit ratings. Therefore, to borrow the same amount of money for markets, countries with low credit ratings must pay more than high-rating counterparts.
Because credit rating is a key factor for an investor to make a decision, any major announcement by a major credit rating agency will directly affect its related currency transactions in the Forex Market.