The month of May not only brings spring flowers but, hopefully, also an agreement by European Monetary Union (EMU) officials to finally craft some type of bailout agreement to aid Greece with its debt refunding. There is nothing like a hard deadline to get people motivated, and the looming Greek debt refunding on May 19th might be the catalyst to finally craft an agreement. Among the biggest hurdles has been the reluctance of Germany to support any aid package for its southern EU brethren. German voters are overwhelmingly against any German aid to help Greece with its deficits, and German Chancellor Angela Merkel would like to see any EU vote on helping Greece delayed until after the state elections in North Rhine- Westphalia on May 9th -- the most populous region in Germany. However, this would leave little time for any agreement to be reached and aid to be sent to Greece in time for its debt refunding only 10 days later. If that were not enough, Standard & Poors downgraded the credit ratings for not only Greece, but Portugal and Spain as well last week, as credit rating agencies fear that the debt crisis could spread to other European nations struggling to recover from the global economic crisis. Speculators are still negative towards the Euro, according to the Commitment of Traders report. As of April 20, both large and small speculative accounts were holding a combined net short position of 73,372 contracts. However, this position is well off the record 95,965 combined short positions that occurred just one month ago. Additional short-covering may occur early in the month, as traders lighten-up on risk if an agreement is reached. The likelihood of volatile trading in the Euro over the next several days looks to be heightened, as traders eyes are glued to the newswires awaiting comments from EU leaders regarding whether an agreement can be reached in time to divert a default by Greece on its debt obligations.
The Eurocurrency could be experiencing the "calm before the storm", as traders brace for the announcement of an agreement to help Greece with its debt refunding. Given the large net-short position in the Euro being held by speculators, the likelihood of a sharp rally caused by short-covering in the Euro is high if an agreement is announced. However, should EU officials fail to adequately address the pending debt crisis, we may see the Euro fall sharply. Traders looking for a large move in the Euro who are not sure of the direction may wish to consider the purchase of a strangle in Euro futures options. An example of this trade would be buying the June Eurocurrency 1.37 calls and buying the June Eurocurrency 1.29 puts. With the June Euro trading at 1.3277 as of this writing, this strangle could be purchased for about 117 ticks, or $1462.50 per spread, not including commissions. The premium paid is the maximum risk on the trade, with the trade being profitable should the June Euro futures be trading above 1.3817 or below 1.2783 at option expiration in June.
Looking at the daily continuation chart for the Eurocurrency futures, we notice prices attempting to rebound from the recent lows made after the S&P credit ratings downgrade hit the wires. Since the lows were made at 1.3117 this past Wednesday, the Euro has rallied over 200 ticks, as weak shorts covered their positions going into the weekend. However, technical traders will note that the Euro must overcome some major technical hurdles in order to turn the trend in favor of the bulls. The major downtrend line drawn from the December 2009 highs comes into play near the 1.3500 area and should act as a strong resistance to any rally attempts. Above this technical barrier, we have the 100-day moving average, which comes into play just above the 1.3800 area. Near-term support remains at the April 28th lows of 1.3117.
Mike Zarembski, Senior Commodity Analyst