A Euro For Your Thoughts!
Fundamentals
Even this phrase is not as expensive as it appears, because the Euro Currency is down nearly 20% from its highs made last April, since the economic downturn has hit the Continent hard. The International Monetary Fund (IMF) predicts continued weakness for the Euro zone this year, currently forecasting an economic contraction of 4.2%, vs. a 2.8% decline in the U.S. This weakness should allow the European Central Bank to once again lower its benchmark interest rate by an additional 25 basis points to 1% next month. However, many economists and analysts believe that the ECB is not doing enough to help revive economic growth and have fallen behind efforts by other major economic powers, in lowering interest rates and engaging in more unconventional methods, such as "quantitative easing" to stimulate credit markets. However, not all the news is bad for the euro zone, with yesterday's release of the Purchasing Managers' Index (PMI) showing euro zone manufacturing rising by nearly 3 points to 36.7 in April, and the services Index rising by just over two points during that same period to 43.1. Although the increase in PMI was indeed viewed as positive, readings under 50 still mean contraction is occurring, albeit at a more modest rate than in March. The ultimate challenge facing the Euro is how to solve the various economic issues facing each of the 16 nations using the common currency. A solution to help out Germany and France may be the exact opposite of what is needed in Spain, Italy or Greece! It is this delicate issue regarding what course of action to take that will be the ultimate challenge for ECB officials in order to keep the Euro viable.
Trading Ideas
Traders expecting continued weakness in the Euro Currency could choose to explore the purchase of bear put spreads in Euro futures options. An example of this trade is buying a June 1.30 put and selling a June 1.25 put. With the Euro trading at 1.3060 as of this writing, the spread could be purchased for 156 ticks, or $1,950 per spread, before commissions. The cost of the spread is also the maximum risk, with a profit potential of $6,250, minus the actual cost of the spread if the June Euro futures is trading below 1.25 at expiration.
Technicals
Looking at the daily chart for the June Euro, we notice a moderate rally over the past few days, after prices fell to 1-month lows once near-term support at 1.3114 failed to hold last Friday. Notice that both the longer-term and shorter-term trends are bearish, with a major downtrend line formed from the 12/18/2008 highs. Prices are well below the 20-day moving average, but the 14-day RSI has turned more neutral with a current reading of 46.19. Near-term support is seen at yesterday's lows of 1.2878, with resistance found at the 20-day moving average currently at 1.3214.
Mike Zarembski, Senior Commodity Analyst
