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The Currency Trade Behind Italy's Turmoil

Ulf Sjostedt | Photographer's Choice RF | Getty Images

With the Italian Parliament poised for its final vote on the proposed austerity plan, you need a trading strategy. Here it is.

It's been a big week in Italy, and the drama will run into the weekend as the Italian Parliament votes on a proposed austerity plan. If it passes, it should create a climate of greater stability and prudence. But it's become all too clear that things don't always go as expected in Italy.

Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional, think it's time to put on a trade based on waning risk appetite - just not with the euro.

"I like looking at Sweden because it's very tied to U.S. equities," she told CNBC's Melissa Lee. "If you see U.S. stocks going down, the Swedish krona tends to get sold off very quickly." Also Patterson says, Sweden is likely to cut interest rates, which would hurt the krona.

Patterson wants to buy the dollar and sell the Swedish krona at 6.6100 with a stop at 6.5000 and a target of 6.8500.

Be careful, she says: "If we get great news out of Europe this weekend, I'm probably going to get stopped out," she says. "You have to understand there's a lot of binary risk in Europe." But Patterson says her trade is structured so that "I'm not risking half as much as I'm looking to make."

Amelia Bourdeau, director of foreign exchange at Westpac Institutional Bank, likes the trade, noting that in the medium term, Europe is likely to go into recession, "and that will also weaken the krona."

You can watch the discussion on this videotape.

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