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How to Trade Holiday Cheer Using Currencies

Friday, 23 Dec 2011 | 7:16 PM ET
Digital Vision | Getty Images

With equities in a holiday mood, here's how to trade the high spirits using currencies.

Stocks sure have had a nice run lately, and risk-on currencies have been following suit. Andrew Busch, global currency and public policy strategist for BMO Capital, thinks the good times could extend a bit, and he's got a plan to trade the mood.

"If you think the rally is going to extend into next week, and obviously maybe in the first week of the new year, you want risk on," he told CNBC's Melissa Lee.

Commodity currencies continue to be a good bet in that scenario, and Busch would buy the Canadian dollar against the yen. The pair has rallied 2.5% over the last few days, he says, suggesting "good positive correlation with an equity rally."

A more bearish outlook would indicate selling a riskier currency, like the South African rand, against the yen, Busch says. He notes that "the yen appreciated 4% in a very risk-off year, and the rand lost 18.5%. It's the worst performer of the major currencies."

Busch himself is in a holiday mood, so he wants to buy the loonie against the yen. He recommends entering the trade at 76.60 with a stop at 75.50, and taking half your profits at 77.40. And if you hit that target, he says, make sure to move your stop up to lock in your gains.

Todd Gordon, co-head of research and trading at Aspen Trading Group, likes the trade - but he suggests waiting for a pullback. If stocks get to 1,260, he says, he'd be more comfortable entering at that point.

Money Match Up
Will the risk-on rally continue through the end of the year? How to make money from the risk-on rally, with CNBC's Melissa Lee and the Money in Motion traders. With Deutsche Bank's Joe LaVorgna. Also, how to short the euro now, as the ECB takes new measures to support euro zone banks.

You can watch their discussion on this videotape.

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CURRENCY FUTURES

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