GO
Loading...

How to Use Currencies to Trade on Hurricanes

Hurricane Earl is seen on August 30, 2010 in the Atlantic Ocean as seen from space.
Getty Images
Hurricane Earl is seen on August 30, 2010 in the Atlantic Ocean as seen from space.

"Don't know why there's no sun up in the sky, stormy weather...." — Harold Arlen

Hurricane season officially starts tomorrow, and here's how to use currencies to trade it.

Hum all you want, but hurricane season is almost here. That means watchful waiting in vulnerable areas - and higher oil prices when storms do hit areas like the Gulf of Mexico.

Andrew Busch, global currency and public policy strategist for BMO Capital, says it's possible to trade on hurricane news, going long an oil-exporting country's currency and short the U.S. dollar. He told CNBC's Melissa Leethat the dollar fell about three percent against the Canadian dollar after Hurricanes Katrina and Rita, and if you are using leverage in your trade, that can add up to a very solid return.

If federal authorities announced a Gulf-bound hurricane today, Busch would suggest selling the U.S. dollar against the Canadian dollar right around 0.975 with a stop loss of 0.9825 and a target of 0.9525. But not all at once.

"You can start to build into these positions," he says. "Maybe only do a little bit at first, maybe a quarter of the total size of the position. But as the storm especially moves into the gulf and can pick up some real hot water and some energy, that's definitely when you want to get into this."

Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional, agrees. As a native Floridian, she has plenty of first hand experience with hurricanes. And she says it may even make sense to start building positions now in the currencies of oil-exporting countries like Canada, Russia, and Norway so you're ready when a storm hits.

"People will position for this way before it happens," she says, and with the start of the hurricane season and summer driving, oil prices could move up even before a specific storm warning is issued.

You can watch the whole discussion in the videoclip.

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

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