Tuesday, July 26, 2011

BMO Capital: How to Hedge from US Default

Analysts at BMO Capital claim that there are 3 scenarios of the debt-ceiling debate:
  1. The plan close to the one developed by the “Gang of Six” will be adopted.
  2. President Obama will agree to a small extension of the debt limit to prolong the discussion of a major shift of the debt ceiling.
  3. The worst case scenario: US will default or/and loses its top credit rating.
The specialists note that Standard & Poor's seems to be extremely worried by the dynamics of US debt and deficit, so the agency is likely to downgrade the nation even if the debt ceiling is raised.

Fearing the worst, one should sell Australian dollar, the classic riskier currency, versus Swiss franc, the classic safe haven. BMO recommends going short on AUD/CHF at 0.9073 stopping above 0.9203 and targeting 0.8503. Strategists at J.P. Morgan say that selling EUR/CHF may also suit as a strategy.

daily audchf 15-40
Chart. Daily AUD/CHF

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