Money in Motion

Using Currencies to Protect Against Default

The House and the Senate are ready to rumble over debt plans. Here's how to trade the uncertainty.

"Personally I think the debt ceiling will be raised," though the timing is not exactly clear, says Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional. Patterson told CNBC's Scott Wapner that if a better than expected deal comes through, or an earlier than expected deal, "you want to get risk on in your books." To do that, she recommends buying the Australian dollar against the Japanese yen.

Patterson likes the high carry available with the Australia, and the fact that Australia has so much exposure to China's growing economy. On top of that, the Royal Bank of Australia is meeting next week, and Patterson expects them to be hawkish about inflation and interest rates. Conversely, she says, Japan is likely to maintain interest rates at or near zero for the foreseeable future, and "Japan has a debt problem that's more than double America's problem."

Patterson suggests evaluating where things stand in Washington as of Sunday afternoon. If a deal is in place and risk appetite is on the rise, "Just get in," Patterson says. She recommends buying the Australian dollar against the yen around 84.89 with a target of 89.50 and - especially important in this environment - a stop loss at 83.50.

That's all well and good if an agreement is reached - but there is still the possibility that a deal will not get done over the weekend. In that case, Patterson says, risk appetite would weaken and  "I'd be going short euro, long the Swiss franc."

This currency pair tends to track the price of gold, Patterson points out, and the Swiss franc by itself is a defensive currency. So absent a debt deal, "We'd look to go long the Swiss franc against the euro at whatever level it's trading at on Sunday," Patterson says. She recommends a target of 1.0950 and a stop loss of 1.1600.

You can watch the whole discussion, and segments of the House vote, right here.


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