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A Currency Trade for Uncertain Times

Friday, 24 Jun 2011 | 2:47 PM ET
Businessman with crystal ball
Fredrik Skold | The Image Bank | Getty Images
Businessman with crystal ball

When it's hard to read the tea leaves, it's time to trade safe-haven currencies. Here's one smart approach.

There's an awful lot happening to rattle currencies, isn't there? Tracking the debate over Europe's debt crisis is like watching a tennis match, the US economy can't seem to figure out which way it's going, and North Africa and the Middle East just keep getting more...interesting.

All in all, it's not a bad time to take a closer look at safe-haven currencies. Analysts at Barclays Capital have done just that, and they make a convincing argument that buying the US dollar against the Swiss franc is a smart move right now.

Paul Robinson, Barclays Capital's head of FX strategy in London, and two colleagues decided to look at how different currency pairs performed across four possible scenarios: continued slow growth in the U.S., increased problems in Europe coupled with diminishing fears about global growth, escalating Middle East tensions, or a worst case scenario that combines bearish elements of each of the others. In all but one - a mild increase in euro zone periphery problems - the dollar outperforms the Swiss franc, they said, and they think that's pretty unlikely.

"If problems do escalate in the euro area, we think they are increasingly likely to lead to global financial market problems rather than to be contained to a large extent in Europe," the analysts wrote. "Should the latter prove correct, the USD (and JPY ) may be key beneficiaries as liquidity risk premia increase and currencies move back towards fair value."

Another factor to remember: the US dollar is currently at very low levels against the Swiss franc, and investor positioning on the dollar is fairly extreme.

It's worth a thought.

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.

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