How to Trade Europe's Credit-Rating Cuts

Friday, 13 Jan 2012 | 7:55 PM ET
St George's Flag & Houses of Parliament
Peter Adams | Photodisc | Getty Images
St George's Flag & Houses of Parliament

With Standard & Poor's cutting credit ratings for France and others, here's how to trade the changing landscape.

The prospect of ratings cuts in Europe has been on the horizon for over a month, but it still hurt when Standard & Poor's cut ratings on nine countries including France and Austria. The euro tumbled, of course, but Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional, thinks there's a better way to trade the news: looking at countries that really feel the effects of the euro's troubles.

Patterson just returned from a trip to London, she told CNBC's Melissa Lee, and she thinks selling the British pound makes sense. "About 40 percent of the U.K's exports go to the euro area, and a large percentage of U.K. banks have claims on the euro area, so there's a lot of linkages," she says. So when Europe has a problem - or feels the sting of credit-rating cuts - so does Britain.

Patterson wants to sell the pound against the dollar at 1.5295 with a stop at 1.5530 and a target of 1.4800.

Todd Gordon, co-head of research and trading at Aspen Trading Group, says he thinks the trade is "right on," noting that the pound and the dollar have just broken out of a three-year trading range. "That's Rebecca's entry, take the profit down to 1.48, but we're talking long-term implications around 1.30 on the break of this pattern," he says.

Money Match Up
After months of rumors, S&P downgraded France, Italy and Spain. Germany, the Netherlands and Finland were spared. What the downgrade means for the euro, with Sean Egan, Egan Jones, CNBC's Melissa Lee and the Money in Motion traders.

You can watch the discussion on this video.



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