Climbing a Wall of Worry?
Fundamentals
"No market can go straight down forever!" That seems to be the catch phrase of buyers of the Eurocurrency the past several sessions, despite continued concerns about the fiscal policies of several E.U. members. Since falling to its lowest levels since 2006 on June 7th, September Euro futures have rallied nearly 500 ticks on what many traders believe is nothing more than short-covering buying. The rally in the Euro also corresponds with a rally in U.S. equity prices, as it appears that traders and investors are starting to view an economic recovery in the U.S. will not necessarily be derailed by the European debit crisis. Talk that Spain would be seeking financial aid from the E.U. or possibly the IMF on Wednesday failed to cause much reaction in the Euro, which only fell slightly vs. the greenback. If we take a look at the most recent Commitment of Traders report, we notice non-commercial traders (hedge and commodity funds) decreased their net-short position by over 20,000 contracts. This report was as of June 8th, which was at the beginning of the recent price correction in the Euro. This is a good lesson for traders on the potential short-term dangers of entering a market when traders' sentiment moves to extreme levels -- either bullish or bearish -- despite the fundamental outlook.
Trading Ideas
Fundamental traders who believe that the Euro will fall further due to the continued problems of many E.U. countries may wish to consider using the recent rally to begin to initiate trades that will benefit should that rally prove to be no more than a correction in the long-term bearish trend. An example of such as trade would be buying out of the money put spreads in Eurocurrency futures options. For example, with December Euro futures trading at 1.2405 as of this writing, the December 1.20/1.10 put spread could be purchased for about 0.0220, or $2,750 per spread not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $12,500 minus the premium paid at expiration in December should the December Euro futures be trading below 1.1000.
Technicals
Looking at the daily continuation chart for the Eurocurrency futures, we notice that the front month futures have finally moved above the 20-day moving average for first time since mid-April. The 14-day RSI had bottomed just over a week before the recent lows were made, which set-up a potential bullish divergence, which was confirmed by the recent rally. Although the short-term trend has turned positive for the Euro, bulls would need to see a close above the 100-day moving average, currently near the 1.3180 area, in order to regain control. Support is seen at the June 7th lows of 1.1874.
Mike Zarembski, Senior Commodity Analyst
