Moody’s Investors Service is becoming cautious about US debt. One could say “What took you so long?”. The rating agency predicts that US Treasury will have to spend about 7% of its total tax revenue just to service the debt in 2010. Not paying it off, but in the interest to lenders. This figure is expected to rise to 11% in 2013 and probably even higher after that. It is the highest ratio among top rated countries, except for United Kingdom. According to Moody’s, that alone can push US closer to losing its AAA rating. Wouldn’t that be something.
No doom and gloom yet, but US Treasuries already have to pay small premium when compared to other debt instruments. Under normal circumstances, they are the lowest yielding, because of implied absolute safety of principle. However, currently some corporate debt trades at yields lower than comparable Treasuries, which is very unusual. Johnson & Johnson, Procter & Gamble Co. and Berkshire Hathaway Inc. can borrow money cheaper than US government. Difference is minuscule, on the order of 2-3 bases points, but the fact alone is a food for thought. Evidently markets “think” that it is safer to lend money to these corporations than to the government. Eventually debt level will have to push rates much higher and it will become far more important issue than it is right now.
Currently short term trades are of more pressing nature. Opening after the weekend produced plenty of gaps, but they were all too small for me apply gap strategy, so no “fill the gap” trades. However, gaps played a role in trades mentioned in the last post, most notably GBP-CHF, which I intended to buy. Price gaped down at the open, not buy much, but that typically indicates direction of first move. I waited a little bit and then started to trail minor highs with buy orders, using hourly chart.
Over few hours price made two new lows and my buy order followed it. Finally it was filled at 1.5911. My objective was still 100 pips. I stayed in a trade all day, went to sleep and now, after waking up, decided to close it. It probably has more upside potential. On the other hand, I don’t want to repeat situation from last week, when large gain turned into a losing trade. Position was covered at 1.5980, for 69 pips.
Next one was EUR-NZD, which I also wanted to buy seeking 100 pips. Small gap formed and filled, or just about filled, fairly fast. This presented 2 options – buying right there or above the minor high, with an entry at 1.9160, depending on the spread, which can be wide here. I settled on getting in at 1.9129. Move came soon after and made 100 pips. BTW, had I waited and entered at around 1.1960, transaction still would have been good.
Interesting situation in JPY pairs. First a sell off, foolowe by sudden reverse… Supports have been broken, so perhaps more downside potential here. I would like to see CAD-JPY to reach about 90.00 level. If that happens, or close to it, formation of reversal candlestick patterns could be a signal to sell, with an objective of 88.00 or just under. For now. Even more possible a little later, but one step at a time. Let’s see if this happens first.
Mike K.
The eur-nzd trade was neat. I got in at 1.9163 and still managed 100 pips, in barely. Great feeling, though, getting out at the top of the move! THX!
Mike, I sent you an email with a proposal for something. Would you read it and respond, please? I’d appreciate it.
That’s good to know, Michelle. Congrats!
[...] the Moody’s on US debt post I discussed CAD-JPY. My idea was to sell it if the price reached about 90.00. It took all day, [...]
[...] even try to add another buy, should market drop to 0.7200. As is, this trade became history. So, after a good start, later part of the week was flat or barely positive. I’ll worry about next moves in couple [...]
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