Money in Motion

Busch: A Currency Trade for the Next Three Days

One hundred dollar bill and one hundred euro bank note
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Risk-off sentiment is easing, but the European debt crisis is not even close to being solved. Here's how to trade the new mood.

* The FOMC minutes showed a discussion of QE3 — a third round of Fed easing — and this helped lift US stocks. It also helped temporarily reduce risk-off sentiment.

* Also, rumors of European Central Bank and China buying periphery debt rallied the euro against the dollar from the lows of 1.3840.

* Soothing comments from the IMF and Germany on "crisis" along with China's stronger than expected GDP have helped rally global equities.

However, the European debt crisis is not close to being solved, and CDSs for Italy and Spain remain near 300+. Also, option volatility spiked on Monday/Tuesday with gamma very expensive. While this has backed off, the decay for the weekend will be costly and will likely force some to exit.

Therefore, I want to fade this positive risk-on theme ahead of Friday's European bank stress test results.

Sell EUR/Buy USD

Entry 1.4225 (Bottom from Thursday and Friday)

S/L 1.4375 (above the highs of Thursday and Friday)

T/P 1.3775 (Just above the low of March)

For those who are more aggressive and don’t think we’ll get a rally that far:

Sell EUR/Buy USD

Entry 1.4075

S/L 1.4225

T/P 1.3775


Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a contributor to CNBC's Money in Motion Currency Trading.

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