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How to Trade on China's Economic Outlook

AP

China will soon release its latest inflation report, and this strategist has a trade to get you ready.

If you like trading on economic data, you'll have a lot to choose from in the coming week. Andrew Busch, global currency and public policy strategist for BMO Capital, is especially interested in China's upcoming CPI report, due out on Feb. 8.

The level of inflation "has been critical for whether or not the Chinese are going to cut interest rates and spur economic growth in that country, and lead to risk-on trading," he told CNBC's Melissa Lee.

Busch says investors are expecting CPI growth of about 4 percent. If it comes in below that number, he recommends buying the Australian dollar against the U.S. dollar, since he thinks China would be likely to cut interest rates and spur growth.

On the flip side, if inflation rises more than 4.5 percent, Busch thinks that will reduce the chances that the Chinese will cut rates - and in that scenario, he would sell the Australian dollar and buy the Mexican peso.

Australia's fortunes are heavily tied to Chinese economic growth, Busch says, while Mexico is a play on what appears to be an improving U.S. economy.

Busch wants to enter the Aussie-peso trade - which is a short-term one, he says - at 13.69 with a stop at 13.71 and a target of 13.61.

Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional, likes the concept, noting that the Australian dollar faltered today at its highest levels. "If we do get a Chinese CPI that suggests they can't ease, I do think the Australian dollar is vulnerable to that," she says.

You can watch the discussion on this video.

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