European Central Bank President Mario Draghi is under pressure to do more to resolve the debt crisis. Here's how to trade if he does something super.
You wouldn't really know it from the recent performance of the euro, but the European debt crisis is, by many accounts, worsening. So far, European Central Bank President Mario Draghi has shown no interest in acting as the euro zone's savior, but the pressure is mounting.
"Contagion is out of control at this point," says Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional, noting that even German government bonds have been selling off. But perversely, "More and more of that will make it more and more likely that the ECB does ride to the rescue."
That should be bullish for the euro, right? Not necessarily, Patterson told CNBC's Melissa Lee. If the ECB does wade in, she says, "They're going to cut rates, so the yield for the euro gets less attractive. They could possibly be printing money, and in theory that could create inflation fears which would weigh on the euro." On the other hand, if the ECB were really effective, "that would be euro positive, so it's not a clear cut trade."
That's why Patterson wants to play the possibility of an ECB rescue as a straightforward trade on risk appetite, buying the Aussie against the dollar. She wants to wait for a pullback as conditions worsen in Europe, and buy the Australian dollar at 0.95 with a stop at 0.91. Then she would look for the ECB to act, and target a move to 1.05.
Brian Kelly, cofounder and managing member of Shelter Harbor Capital, agrees with Patterson's analysis. "If we look over the next week, it's probably going to take some kind of crisis before the ECB acts, before there is actually a deal on the table," he says, and "The markets are starting to push the ECB that way."
