How to Use Currencies to Profit From the Sovereign Debt Crisis

Piazza Venezia, Rome, Italy
Panoramic Images | Getty Images
Piazza Venezia, Rome, Italy

Italy's tanking bonds are a reminder that Europe's debt crisis is alive and well. Here's how to trade on it.

Mamma mia! Who knew Italy was next in line to be embroiled in the sovereign debt crisis? OK, it's not - yet. But falling Italian bond prices and expanding CDS spreads, a measure of the cost of insuring against default, are suddenly reflecting a significant degree of nerves among investors.

"Italy kind of crept up on us. We had been looking at Portugal and the market had been concerned about Spain," says Amelia Bourdeau, director of foreign exchange at Westpac Institutional Bank. "It's a clear reminder that "European leaders have not managed to contain this crisis," she told CNBC's Melissa Lee.

Jens Nordvig, head of G10 foreign exchange strategy at Nomura Securities, is equally troubled by the mess in Italy, which he thinks could worsen. "The main concern going into next week is that you have potentially a change at the Italian finance ministry and potentially some political tension there" on top of everything else, he says.

Is there a way to profit from the upheaval in the euro zone? Yes, says Nordvig. "Given how the tension has escalated in Italy this week," he says, "This is a good level to short the euro" against the dollar.

Nordvig recommends selling the euro at $1.4250 with a stop at $1.4550 and a target of $1.3750.

Bourdeau is equally negative on the single currency. "Any rally in the euro, I definitely would like to sell," she says. "There's just too much headline risk."

But Todd Gordon, co-head of research and trading at Aspen Trading Group, begs to differ. Looking at technical patterns, he says the euro "is looking technically very supported."

You'll have to decide yourself who is right, but here's the whole discussion to help you out.

** Aspen Trading Group is short USD/CHF and USD/SGD.

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