GO
Loading...

How to Trade on Euro Weakness

London Bridge
Photo: Chris Hepburn | Getty Images
London Bridge

With the euro having another rough day, here's how to play investors' sour mood.

What a difference a day makes.

The euro started 2012 on the upside as investors' risk appetites picked up - but a German bond auction and waning euro zone inflation have been taking the single currency down sharply.

Camilla Sutton, chief currency strategist for Scotia Capital, says the outlook for the euro remains bleak - but she would rather trade the negative sentiment by selling the British pound against the dollar.

"I think there's lots of opportunity there. In a sense, it's a low-beta way to play euro downside," she told CNBC.

The pound has been range-bound for some time, and right now it "looks poised to test the downside," since it's likely to follow the euro's moves.

Why not just short the euro? There are more bond offerings coming up, potential sovereign debt downgrades are looming, and as Sutton says, "the euro technicals look horrible." She thinks that if the euro breaks below the mid-1.28s against "we're likely to see downside from there." However, she says, alluding to CFTC data on trader commitments, everyone's in that trade.

So Sutton wants to sell the pound against the dollar at 1.56 with a target of 1.54 and a stop at 1.5720, just above the 5-day moving average.

You can watch the 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 Terms Dictionary. 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.