President unveiled new budget for 2010. Government spending is proposed to increase $3.83 trillion, with a hole of $1.56 trillion for the year, the biggest budget shortage ever. Over last couple of years we have gotten used to trillion dollars figures, so it might not carry the edge it once used to. But to put into perspective, this one year deficit alone amounts to a little over 10% of GDP. When combined with the money that had to be borrowed last year, and projected deficit for the next fiscal year of similar proportions, debt from these 3 years alone will be around 30% of GDP. Government is expected to to operate in the red for the rest of the decade, so within few years our debt burden should be equal to, or exceed, Gross Domestic Product, seriously undermining our ability to repay it.

Lat week other countries with questionable budgetary practices watched their sovereign bonds fall. Dramatically in some cases. Greece’s debt suffered the biggest decline ever, with rates jumping almost 1% in a few days. Portugal suffered similar fate. Other countries as well. This might or might not have effect on long term US Treasuries, but doesn’t set a good precedent for most immediate future. Falling bods mean higher interest rates, something that financial authorities desperately want to avoid during time of high unemployment.

Fortunately for USD, we are not the only country with this predicament. The Dollar has reached an important point against many other currencies, as explained yesterday using NZD-USD daily chart. Bounce here could even be a welcome development, because it would make eventual breakout more meaningful when it comes. Well, IF it comes. Markets are ever shifting, so no certainties, but they also have fairly short attention span, with most recent news always prevailing. Within few days focus might easily shift to another crisis, perhaps benefiting USD.

There were many gaps at the opening, but most of them were not tradable. Either too small or closing right away, without providing any entry points. One of the few exceptions was GBP-CAD, which offered some a trading opportunity. However, price didn’t move far enough, move ran out of steam and I got out with minor gain of 19 pips.

Yen has failed to make more gains, in fact it looks like it is reversing. There were plenty of very short term set ups, but not too many providing opportunities of the size I seek. Seems like every JPY cross behaves differently, with couple of exceptions. NZD-JPY and CAD-JPY look similar, and they might be first ones to move if indeed reversal is taking place. Before getting into it with any conviction, I’d like to see NZD-JPY to reach about 64.90, pull back and try it again. That would signal a buy, with about 130 pips target. Maybe a little more.

Another interesting chart is that of EUR-AUD. Price made a new minor high on intermediate term chart and is currently falling. Should it resume upward momentum, buying above 1.5820 looks appealing to me for about 280-300 pips. Should it fall under 1.5550, another buying opportunity could be present. This is tentative of course, because of RBA rates decision later on today. It is too important to ignore. I’m currently in AUD-CHF, in the red. Will be watching it if comes close to 0.9440 and see if 100 SMA and previous resistance hold.

Mike K.