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Prepare for an Oil Shock With Currencies

Oil Pump
Harold Sund | Getty Images
Oil Pump

There is a lot of tough talk emanating from the Middle East. Here's a currency-trading plan in case the situation worsens.

With all the news about oil output and rumors of possible military action in the Middle East, it's a good idea to have a trading plan in the event of an oil shock.

Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional, is looking north for her plan.

"If you are trading currencies and you see a headline go across the tape saying something has happened, what's the first thing you should do? If it's a supply shock, I want to go with a current account surplus country. I want to be long the Norwegian krone," she told CNBC's Melissa Lee.

To keep the trade liquid, Patterson suggests using the euro as a cross. Also, because "we don't know what levels we'll be at if and when this happens," she says, "we're just going to use where we are now as an example."

So for now, Patterson suggests entering the trade right around 7.6200, with a stop at 7.4000 and a target of 7.7000.

Todd Gordon, co-head of research and trading at Aspen Trading Group, says the trade measures up nicely in technical terms. And Patterson adds that it's not just the oil issue that could make this trade work.

"Norway has a current account surplus. If equities fall this week and people take risk off, that could also benefit Norway at the margin."

You can watch the discussion on this video.

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