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Why Northern Euro Zone Seems Best Bet

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Did you really think the euro zone was completely out of the woods?

The euro had a great run through the second half of 2012 and into this year - but it ground to screeching halt last week, tripped up on worries aboutpolitical risks in Spain and Italy and a looming G20 meeting.

The common currency's nearly two percent decline against the dollar was a clear reminder that plenty of risk remains in the euro zone - and it's giving the strategists at Barclays Capital ideas.

"EUR strength will require an improvement in cyclical fundamentals, which is unlikely to be a smooth process," they wrote in a note to clients, not least because of the divergence in economic strength between southern and northern euro zone countries. So the strategists have looked for a currency that stands to benefit from northern strength, and they are picking the Swedish krona.

"Sweden benefits from its close trade links with northern European economies even as EUR strength remains subdued," they say, and they expect the krona to strengthen relative to the euro.

A couple of key events bear watching for those interested in this trade. First, the BarCap strategists expect an upcoming report on French industrial production to come in slightly below forecasts, which could add to the downward pressure on the euro. But on the flip side, an upcoming Swedish central bank meeting creates some near-term event risk.

The bottom line: the BarCap strategists recommend that investors "use any move higher in EUR/SEK to re-establish medium-term short positions."

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