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How to Play a Week of Earnings Reports Using Currencies

Monday, 10 Oct 2011 | 1:07 PM ET
Kristianstad, Sweden
Source: Måns Sjödahl
Kristianstad, Sweden

It's time for earnings reports — and if you don't want to trade individual stocks, you can use currencies to trade general sentiment.

It's hard to know how earnings will come in this week — and harder to know how investors will react. Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional, thinks an overall rise of around 2.3 percent is "achievable," but she's keeping an eye on the tone of the guidance that companies provide.

And with Europe still in crisis mode, "I still think there's a lot of macro risk for the U.S. almost regardless of earnings," she told CNBC's Melissa Lee.

If you want to trade that mood, rather than individual companies' prospects, Patterson suggests using a currency with heavy foreign ownership. When sentiment is bullish and investors are buying stocks in that currency's nation(s), they have to buy the currency — and vice versa — so you get a nice correlation between the stock market and the currency.

Money Match Up
As Europe's debt crisis grows, Fitch cuts Spain's credit rating and maintains a negative outlook. And the currency trade in light of Greece's debt crisis, with CNBC's Melissa Lee and the Money in Motion traders. With Sean Egan, Egan-Jones Ratings Co.

The Swedish krona , with roughly one-third foreign ownership and a couple of big tech and telecom companies, fits the bill, Patterson says. Over the last five years, she has seen an 82 percent correlation between the krona-euro pair

and the S&P 500.

Since Patterson's "bias still says there's downside risk out there, despite the valuations in equities," she recommends buying the euro against the krona at 9.07 with a target of 9.35 and a stop at 8.95.

You can watch the whole discussion in the videotape, above, starting at 8:51.

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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