Couple of weeks after Dubai scare, concerns over credit worthiness of other small countries are spreading. Greece, which had been on a hot seat for some time over its fiscal policies, just had its sovereign credit downgraded. The rating on countries government bonds was  cut by Fitch Ratings to BBB+ and the two other major ratings companies are threatening to follow suit. It is after Greek government raised its 2009 budget-deficit estimate to 12.7% of gross domestic product after Oct. 4 elections, three times higher than an earlier forecast and more than four times the 3% allowed under the European Union’s Stability and Growth Pact. This could have long term implications on economy, raising costs of borrowing and slowing down recovery.

Greece has about a year to get its fiscal state in better shape or its banks will have hard time getting new capital. European Central Bank  currently accepts bonds rated BBB- as collateral for loans after relaxing its rules in response to the financial crisis last year. At the end of 2010, it is due to revert to the old rules, under which A- is the minimum required rating. As of right now Greek bonds still meet the standards, but that not might be the case next year at this time. In reality, though, it is very unlikely that ECB would turn its back on one of the member states, as long as situation doesn’t repeat with other countries across the continent.

Surprisingly, rating agencies don’t say much about risks of other countries, where situation is worse than Greece. Japanese debt is far bigger, yet there is no talk about downgrading their bonds. Ditto for US. Well, I’m sure this is politically driven, trying to convey illusion that “safe havens” are still around. Currencies largely shrugged off the news, with not much of a reaction. After couple days of directional news, it was time to consolidate before next move can take place. Nothing unusual, and even anticipated, given the fact that tomorrow two major central banks hold policy meetings- in Great Britain and Switzerland.

I took this opportunity to close EUR-USD short trade.  Target level was about 1.4660. Price just missed it yesterday and bounced almost 100 pips. Early in a trading day another run was made on the lows, but again no progress. I got out at 1.4700 for 95 pips gain. Not a bad trade, but very long in coming. EUR-USD currently has very nice daily volatility. Combined with extra low spread that is available for this pair, these are golden conditions for scalpers. Even 1M charts are very tradable. Good times.

All Yen pairs are also consolidating after couple of days of steady sell off, with direction of next move uncertain. Intermediate term charts retraced to the middle of previous up swing and are sitting in a no-man’s land. Hourly charts are building holding pattern without any real clues as to what could come next. If it was early in the trading day, I’d favor an upside breakout, but given the time I think that JPY crosses will keep moving sideways, as defined by hourly charts, with maybe couple more swings within this general area.

It doesn’t mean day had to be dull. These ranges in JPY pairs are plenty big for trading smaller time frames. Beast moves almost always, so I took couple of stabs at it. First one was pretty good, bringing 88 pips, while next one less so, for 24 pips. Far short of the 70-80 pips objective, but it is not moving fast and I want to close the shop for the day, so I closed it. Tomorrow will be important for Pound, which came under pressure today on pre-budget report. I expect reversal of fortune, but who really knows?

Mike K.