Money in Motion

How to Trade the Next Rating Cuts

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Now that S&P has done the unthinkable, you need to know who might be next. Here's the list, and how to trade it.

Think the United States is the only country in the rating agencies' sights?

Think again.

The analysts at Brown Brothers Harriman have published a list of who could be next to take a ratings hit.

"France, Belgium, UK, and Japan are in the firing line and I think at great risk of a downgrade," says Win Thin, global head of emerging markets strategy and a senior currency specialist at Brown Brothers. "Most of the European periphery too," he told me. 

(Earlier today, as a matter of fact, Moody's took a swing at Japan, warning that its attempts to stem the yen's rise are not helpful to its rating.)

Here's the detailed list.

So how do you trade these possible downgrades?

"I'd say the British pound is likely to start underperforming as downgrade risks rise," Thin told me. Also, he says, "Euro could start feeling gravity's pull if the core (France and maybe Belgium) get cut and get caught up in this mess."

The solution, he says, is to go long the safer currencies, like the seemingly invulnerable Swiss franc.  "Safe havens will remain bid," he advises. And surprisingly, the dollar might not be hit as hard as you might think, he says.

"The punchline is that the US remains "risk free" despite the downgrade for lack of any deeper, better alternative. The true AAA credits that I mentioned are all too small to absorb global capital flows like the UST market is able to do," Thin told me.

At least there is some good news on a rough day.

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