Traders Show No Love for the Euro
Fundaamentals
What a difference a year makes! That is the cry of currency traders especially regarding the plight of the Eurocurrency versus the U.S. Dollar. It was less than one year ago that many pundits were decrying the end of the greenback as the reserve currency, as many nations were diversifying their foreign exchange reserves away from the Dollar and into other major currencies -- especially the Euro. However, it looks like the Dollar is not ready or willing to give up its dominance quite so easily, as traders are beginning to take a closer look at the economic issues affecting the European Union, and they do not like what they are seeing. The biggest issue weighing on the Euro at this moment seems to be the economic plight facing Greece, whose increasing budget deficits have investors and credit rating agencies concerned that the country may be forced to default on its sovereign debt. If this were to occur, other member nations of the E.U. might be forced to help bail out Greece, despite tough talk out of Brussels that no financial bail-out would be forthcoming. Other E.U. member countries such as Portugal, Spain, and Ireland are also hurting from the economic fallout, which puts further pressure on the European Central Bank to remain accommodative in its interest rate policy longer than it may be comfortable doing. This is especially true if signs of rising inflation come to the fore. This plight has taken the luster out of the Euro, which has fallen by over 1200 pips since recent highs were made back in December of 2009, as speculators who were holding large long positions in the Euro were forced to liquidate as the value of the Euro fell. Ironically, the fiscal situation in the U.S. is not much better, as the U.S. is also facing record budget deficits and there is no indication that the Federal Reserve will be raising interest rates any time soon. So with both the E.U and U.S. facing economic challenges, it may be Gold that ultimately benefits, as investors look for a safe haven outside the currency markets.
Trading Ideas
With the Euro having already fallen 1200 points since its peak, it might be psychologically difficult to initiate a short position at current levels. However, the currency markets have historically been one of the best market s for trend-following traders, as trends in currencies can last for months, or even years! The next major support point for the Euro appears to be near the April 2009 lows of 1.2882, and a trader looking for a continued decline in the Euro who believes that the major support at 1.2882 will hold, could possibly look into buying a ratio put spread in the Euro options. An example of this trade would be buying the June Euro 1.35 put and selling 2 June Euro 1.285 puts. With the June Euro trading at 1.3914 as of this writing, the ratio spread could be purchased for about 60 ticks, or $750 per spread, not including commissions. The maximum potential gain of $8,125 minus the premium paid would be realized if the June Euro closed at 1.2850 at the option expiration in June. Since 2 puts are being sold for every 1 put purchased, the risk on the spread will increase should the Euro fall sharply below the 1.2850 level where the options were sold. Given this risk, traders should monitor their positions very carefully and set a pre-determined loss point at which to close-out their positions early.
Technicals
Looking at a daily continuation chart for the Euro Futures, we notice the market looks to be in the midst of a second down-wave, after spending nearly a month in a consolidation phase to start the year. Prices are now well below both the 20 and 100-day moving averages, and the 14-day RSI is holding just above oversold levels with a current reading of 30.35. We need to go back to the lows made in May of 2009 to find support near the 1.3475 area, with the next major resistance point seen at the 100-day moving average near the 1.4640 area.
Mike Zarembski, Senior Commodity Analyst
