Your Currency Trade on the Stock Market Rally
Stocks have been strengthening, but currencies tell a different story. Here's a trading playbook.
If you've been buying stocks lately, congratulations. The market is in a melt-up, with its winning streak extending for six weeks so far.
Currencies, however, are not following suit. And that is giving Kathy Lien of BK Asset Management some trading ideas.
"I don't think the rally is going to last. There's a major disconnect between how stocks are moving and how currencies are moving," she told CNBC's Melissa Lee. And Lien expects the stock traders to be proven wrong, so she has a playbook on the market's strength.
"If you think that currencies are going to catch up to the move in equities, I think the right currency to look at is going to be the Australian dollar," she says. She likes the Aussie's sensitivity to equities and relatively high yield - as well as the fact that it has fallen lately.
On the other hand, for investors who think the market is overdone, "I think the currency pair to express a correction trade through is going to be the euro dollar."
Lien is on the side of the currency traders, what with the looming fiscal cliff and the European debt crisis, so she wants to sell the euro against the dollar. She would enter the trade on a bit of a rally, to 1.2360, setting a stop at 1.2470 and a target of 1.2200.
Rebecca Patterson, chief investment officer at Bessemer Trust, shares Lien's view of the stock market. She notes that economic data was beating low expectations in June and July, but "now we're back to a place where consensus expectations are rising, and it gets harder to beat those expectations."
Learn more: The essential vocabulary for currency trading is on Key Terms Dictionary. Top currency strategies are broken down for you in Currency Class.
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