Money in Motion

How to Use Currencies to Trade the Debt-Talk Logjam

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Those debt talks were moving along - until their latest stumble. Here's how to trade the ups and downs.

Andrew Busch, global currency and public policy strategist for BMO Capital, describes three scenarios for the debt-ceiling debate.

One possibility, he told CNBC's Melissa Lee, is that something resembling the "Gang of Six" plan would be adopted. Another - perhaps less likely given the latest stumble - is that if serious work were being done on a deal, President Obama might sign a 30-day extension. And then there is the possibility that the U.S. actually defaults, or loses its top notch credit rating, or both. "This is the one that's got everybody scared," Busch says. Standard & Poor's is "very concerned about the trajectory of U.S. debt and deficits," and they might actually downgrade U.S. debt even if the debt ceiling is raised, if that's all that's accomplished.

"For those of you who think there's financial Armageddon coming," and the worst case scenario will come true, "we're looking at trying to fade the risk-on or jump into risk-off," Busch says.

Busch recommends selling the Australian dollar, typically a risk-on currency, against the Swiss franc, a classic safe haven.  He would sell the Aussie at 0.9073 with a stop loss of 0.9203 and a target of 0.8503. "This is for you crazy guys out there, beef jerky and get the shotgun types."

Rebecca Patterson, chief investment strategist for J.P. Morgan Asset Management, agrees that the Swiss franc is the currency of choice if you believe in the doomsday scenario. She would buy it against either the Australian dollar or the euro.

"Being long Swiss against the euro or the Australian dollar, I think in either of those outcomes - a default, God help us, not my view, or a downgrade, a more likely possibility - the Swiss franc is going to be a winner."

You can watch the whole discussion right here.

Busch 101 Playbook


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