Your Currency Play on Third-Quarter Earnings

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Businessman with crystal ball

Third-quarter earnings are coming, and this strategist has a currency trade to get you ready.

The latest round of corporate earnings is almost here, and early indications are less than promising: companies' earnings guidance has been more down than up.

Kathy Lien, managing director at BK Asset Management, is cautious. She told CNBC's Melissa Leethat currencies have been rallying less than stocks of late. "We all know the macroeconomic environment is pretty soft, so I would be shocked if we had a lot of earnings surprises to the upside."

But Amelia Bourdeau, director of foreign exchange at Westpac Institutional Bank, is less concerned in the near term. Stocks have rallied for about two months following previous rounds of quantitative easing, and since the latest QE move just came in mid-September, "we have about a month to go," she says.

The Australian dollar for some time has traded in the same direction as the S&P 500, which has made the Aussie a good vehicle for trading a view on stocks. But that relationship has been breaking down, what withinterest rate cuts and falling commodity prices.

So Bourdeau wants to trade her bullish view on stocks using the New Zealand dollar. "The rolling correlation is quite high with the S&P 500," she says, and while she expects further interest rate cuts in Australia, she thinks New Zealand's central bank will hold off. She wants to buy the kiwi against the U.S. dollar at a topside break to 0.8265, with a stop at 0.8175 and a target of 0.8420.

Todd Gordon, co-head of research and trading at Aspen Trading Group, thinks entering the trade earlier - closer to current levels - may be a better option. But he likes Bourdeau's choice of currencies to play this bullish view.

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CURRENCY FUTURES

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