Your Currency Playbook for the Fiscal Cliff

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The fiscal cliff is suddenly looming, and this strategist has a plan for whatever happens.

The prospect of the massive tax hikes and spending cuts known as the fiscal cliff is roiling all kinds of markets, currencies included. At the moment, the dollar is a beneficiary as investors look for a safe haven from the turbulence - but Brian Kelly of Shelter Harbor Capital says that won't last.

"This is not a crisis like we had in 2008, where it was a deleveraging crisis and people had to buy dollars to pay off their debts," he told CNBC's Melissa Lee. "Here we're looking at an economic, business cycle type of issue."

So how could the fiscal fracas play out?

One possibility is that the aggressive tax hikes and spending cuts that comprise the fiscal cliff actually come into play in January - what Kelly calls "a complete cliff dive, no compromise, no anything." That would lead to a sharp drop in GDP, Kelly says, and aggressive money printing by the Federal Reserve which "would lead to significant dollar weakness."

More likely, Kelly says, is that in the near term, some form of political compromise - or hope for compromise - will steer the country away from disaster. But the effect on the dollar would be the same, since a compromise would boost risk appetite and draw investors out of safe havens and also lead to dollar weakness.

"If you're thinking that you're going to get this risk-on hope rally" similar to the summer rally ahead of the announcement of QE3, "you want to buy the Aussie dollar and short the yen," Kelly says.

The yen has the same safe-haven features as the dollar, but it is less likely to be roiled by the ups and downs of fiscal cliff negotiations in Washington. Also, Kelly says, Japan "must, must print money" to stimulate its economy, and that would also put downward pressure on the yen.

Kelly recommends buying the Australian dollar against the yen at 83.00, setting a stop at 81.90 and a target of 86.00.

Rebecca Patterson, chief investment officer at Bessemer Trust, agrees with Kelly that the Fed will respond if the fiscal cliff becomes reality. But she thinks there is a chance the dollar could strengthen if there are bouts of repatriation by jittery investors.

"Broadly speaking, I agree completely with Brian," she says. "I hope we're right that we do get a fiscal compromise, and if we do I think Aussie-yen would be a great way to play it."

China provides another reason the trade should work, Patterson says. The Australian dollar tends to be heavily influenced by the ups and downs of China's economy, given the countries' close economic ties, and "the data out of China recently have been very encouraging," she says. "The market has been so focused on Washington that they've kind of overlooked it, which I think is a mistake."

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