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How to Trade Talk of a Euro Breakup

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With companies testing out plans for a euro collapse, here's one take on how things could play out.

With corporations discussing how they might price products in drachmas and forex brokers stress testing their systems, talk of a euro breakup is intensifying. A little too much, says Robert Sinche, head of global FX strategy at Royal Bank of Scotland.

"We really don't think we're there yet," he told CNBC's Melissa Lee. Alluding to Winston Churchill's famous comment about democracy, he added: "For Greece, staying in the euro is probably the worst possible outcome, except for all the options, and the options really are dire."

Even so, Sinche thinks it makes sense to sell the euro against the Canadian dollar. "There's a lot of negative sentiment around the euro," he said, and he is looking ahead to a possible European recession and easing by the European Central Bank. Also, he says, the euro is closely correlated with the S&P 500, and there have been some notable reversals in stocks lately. The Canadian dollar is correlated with equities too, Sinche says, but the cross rate of the two currencies is not.

This trade is "a good way to play the improving environment here in the U.S. and North America and to also have negative exposure to the euro," he says. "It really takes us out of this risk-on, risk-off volatility that we've been experiencing."

Sinche recommends selling the euro against the Canadian dollar at 1.3790 with a stop at 1.4380 and a target of 1.2800, the low for the year.

You can watch the whole discussion on the videotape.

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.

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