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How to Use Currencies to Protect Your Stock Portfolio

Friday, 11 Mar 2011 | 8:11 PM ET

Worried about the outlook for the stock market? Here's a counterintuitive trade to help you hedge.

Because currencies move in different relationships to stocks, you can use that difference to protect your investments.

For example, in the event of a natural disaster, traders often go to so-called safe haven currencies, and you can join the crowd on that trade.

If you're just looking for a currency trade with close correlation to the stock market, Rebecca Patterson, global head of currencies and commodities at J.P. Morgan's private bank, has an unusual suggestion: selling the euro and buying the Swedish krona.

The Money File
How to use currencies to protect your stock holdings, with CNBC's Melissa Lee and the Money In Motion traders.

"This is a little weird," she told CNBC's Melissa Lee on tonight's premiere of "Money in Motion Currency Trading," but buying euros and selling Swedish krona provides a solid hedge for a U.S. stock portfolio.

(Reason: The Swedish economy is heavily concentrated around technology and telecom, and it is a good proxy for the U.S market when investors are risk on. So selling the krona, against the less volatile euro provides protection against a decline in U.S. stocks. Neat, huh?)

Patterson recommends buying the EUR/SEK at 8.8 with a stop loss at 8.6, and looking for a target of 9.4.

Disclosures: Patterson has no disclosures to report.

CURRENCY FUTURES

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm.

"Money in Motion Currency Trading" repeats on CNBC on Saturdays at 7pm.

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