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The Currency Trade Behind the Euro Bailout

Friday, 23 Sep 2011 | 7:26 PM ET
Oppenheim Bernhard | Riser | Getty Images

Germany is to vote September 29 on new European stability fund powers, just one of several big risk events battering the euro. Here's how to trade on them.

Remember when the House of Representatives didn't pass TARP the first time around and the markets swooned? Brace yourself - strategists say a similar thing could happen in Europe when Germany votes on new powers for the European stability fund on September 29.

Andrew Busch, global currency and public policy strategist for BMO Capital, thinks Germany is likely to pass the package, but warns that dire things could happen if they don't, and Amelia Bourdeau, director of foreign exchange at Westpac Institutional Bank, agrees. "Andy's correct," she told CNBC's Melissa Lee. "If Germany does not pass this, everyone head for the hills. It's going to be really, really bad."

Want more bad news? The Greek Parliament is voting September 27 on new tax measures, and if those don't pass the effect could be equally negative, according to Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional. And on September 28,Finland is supposed to hold its own vote on the stability fund powers.

To trade on all these risk events, Busch recommends selling the euro against the dollar.

If Germany votes yes - which Busch expects they will - he says there could be a bounce in the single currency, which would give you a chance to get into the trade at a nice level before the overriding risk-averse market sentiment takes over again. In that case, he would sell the euro at 1.38 with a stop at 1.3975 and a target of 1.32. If Germany votes no, he would sell the euro at lower levels, like 1.35.

Patterson likes the trade. "I like selling euros on rallies," she says. "It's been my flavor of the month for several months now."

Money Match Up
The euro gets hammered as Greek default approaches. The currency trade behind the euro bailout, with CNBC's Melissa Lee and the Money in Motion traders. And the dollar's gain is gold's pain.

You can watch the whole discussion on this videotape.

CURRENCY FUTURES

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm and repeats on Saturdays at 7pm.

Learn more: The essential vocabulary for currency trading is on Key Currency Terms. Top currency strategies are broken down for you in Currency Class.

Talk back: Tell us what you want to hear about - email us at moneyinmotion@cnbc.com.

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