Traders Flee the Euro as EU Summit Begins
Fundamentals
Bears are running rampant in the Euro, as the beleaguered currency has fallen to 10-month lows vs. the U.S. Dollar as investors move to safer havens ahead of a meeting by European Union officials. Many traders fear that there will not be any consensus by EU leaders as to how to deal with the financial turmoil in Greece, with talk now centered on a possible bail-out involving the International Monetary Fund (IMF). If this were not enough to send investors out of the Euro, Fitch Ratings lowered the credit rating of Portugal by one notch to AA- and issued a negative outlook for the country. The resistance by some EU countries, most notability Germany, to a rescue package for Greece or other struggling EU nations highlights the dissention among the ranks of Eurozone nations and brings fears that the monetary union could fall apart in the future unless some solution to the financial quagmire can be reached. The falling Euro has been a boon for trend-following speculators such as commodity funds, who have been net-short the Euro for some time. The most recent Commitment of Traders report shows large non-commercial traders holding a net short position of 44,717 as of March 16th. Although this is a large net-short position, is it well off the record of just over 73,000 net-short positions seen just a few weeks ago. The move to 10-month lows for the Euro futures should draw in fresh selling from commodity funds, as the recent consolidation phase has apparently come to an end.
Trading Ideas
The breakdown of the June Euro through support at 1.3433 could signal the start of the next wave down for the currency, with a potential test of the April 2009 lows just below the 1.2900 area a likely target. Some traders looking for further weakness in the Euro may choose to explore the purchase of bear put spreads. An example of this trade would be buying the June Euro 1.3300 puts and selling the June Euro 1.2800 puts. With June Eurocurrency futures trading at 1.3354 as of this writing, the spread could be purchased for about 0.0153 points or $1,912.50, not including commissions. The premium paid would be the maximum potential loss on the trade, with a potential profit of $6,250 minus the premium paid should the June Euro be trading below 1.2800 at option expiration in June.
Technicals
Looking at the daily continuation chart for the Eurocurrency futures, we notice the "rounded bottom" formation created since the middle of February failed to halt the Euro's slide. The minor bout of short-covering buying seen last week failed to even set-up a test of minor resistance at 1.4000! Bearish momentum re-exerted itself once the brief rally attempt above the 20-day moving average failed as well. The 14-day RSI is weak, but has not moved back into oversold territory yet, with a current reading of 37.37. The next support target for the Euro futures is the April 2009 lows near the 1.2878 area, with 1.4000 still seen as the next resistance point.
Mike Zarembski, Senior Commodity Analyst
