Bailout Boom
Fundamentals
The Euro posted its strongest gains versus the US Dollar in over half a year after the EU unveiled an aid package for Greece, lowering the chances of the nation defaulting on its debt. The pan-European Union hoped to temper some of the fears surrounding debt of member states by offering the $61 billion aid package. The Dollar, for the most part, has been able to do no wrong in the eyes of traders, as long as the dark cloud of the Greek crisis hung over the EU. Despite taking seemingly forever to come to an agreement, European policy-makers hoped to hush critics that have suggested that credit risk may spread throughout the region, and that the tension surrounding the handling of the crisis could drive a wedge between member states, possibly leading to dissolution down the road. For the time being, many currency traders seem to be rushing to cover short positions. The size of the short position in the Euro is said to be extremely large, which suggests that the near-term short-covering rally could eventually turn into a much more sustained rally. The European policy-makers that were initially against such a bailout may have finally realized that government borrowing costs across the continent could have risen substantially. Lower borrowing costs could possibly lead to economic health, which figures to support the currency. Greece and the rest of Europe, however, are not out of the woods yet, as spending must be reigned-in for the bailout to be successful. The risk of a Greek default has not been eliminated, but rather, mitigated by the move. Traders have been betting on the EU not being able to reach an accord on the situation, so it will be interesting to see how traders behave once the dust settles.
Trading Ideas
The EU finally coming to a resolution on financing for Greece, despite heavy resistance from Germany, could bode extremely well for the currency. It was as if the EU built the Pillars of Hercules to take the weight of the word off of Greece's back. The technical outlook also looks to have shifted in favor of the Euro, after the confirmation of the double-bottom pattern signaled a possible end to the downtrend. For this reason, some traders may wish to take a bullish approach and enter into a bull call spread by buying the June Euro 1.39 calls (ECM01.39C) and selling the June Euro 1.42 calls (ECM01.42C) for a debit of 0.0060, or $750. The spread risks the initial cost for a potential profit of $4,250 if the Euro closes above 1.4200 at expiration.
Technicals
Turning to the daily chart, we see the June Euro confirming a double-bottom pattern. This suggests that the downtrend that began in December may possibly be reversing course. It is interesting to note that the pattern was confirmed on a gap up and the market closing near the lows of the session. Prices managed to close above the 20-day moving average, suggesting that a near-term low may be in place. Yesterday's close did fall slightly below the 50-day moving average, after trading above the average for much of the session. Failure to close above the average could be seen as a technical defeat for the bull camp.
Robert Kurzatkowski, Senior Commodity Analyst
