Euro Rebound Beginning to Stall?
Fundamentals
It appears that the demise of the Eurocurrency predicted by many pundits might be postponed for a spell, as the beleaguered currency has shown new life, rallying over 1100 ticks since the lows were made back in early June. Much of the "strength" in the Euro has been due to short-covering buying by speculators, as the worst fears of sovereign debt default by Greece or any of the other EU nations has not materialized. In addition, less then positive economic data out of the U.S. lately took some of the steam out of the U.S. Dollar, which has benefitted the Euro. Now, however, many traders will once again turn their focus back to the "Continent," and all eyes will be on the results of the European bank stress tests expected to be released on Friday. The upcoming stress test results along with the recent downgrade of Irish bank debt may stall the Euro's recent ascent, as traders holding long Euro positions book profits ahead of the stress test announcements. The most recent Commitment of Traders report shows both large and small speculators holding a net-short position of 37,961contracts as of July 13th. If we compare this to the 115,149 net-short position being held for the week ending May 11th of this year, we can see the huge covering of the short position the past 2 months and how this buying propelled the Euro to its recent highs. Now that the "rocket fuel" has been nearly exhausted, it will be interesting to see if fresh buying will emerge to support the Euro, or if eager bears will use the recent strength in the EC to sell the currency at price levels unexpected just a few short weeks ago.
Trading Ideas
The Euro may be at a turning point now, as prices are hovering right around the 100-day moving average. Some traders who are expecting a big move in the Euro but who are unsure as to in which direction it may occur may wish to explore trading strategies that will benefit from a big move in the currency. One such strategy would be buying a straddle in Eurocurrency options. An example of this strategy would be buying the September Euro 1.2900 call and buying the September Euro 1.2900 put. With the September Euro trading at 1.2882 as of this writing, this straddle could be purchased for about 0.0460 points, or $5750 per trade, not including commissions. The premium paid would be the maximum risk on the trade, with the trade profitable at option expiration in September should the September Euro be trading above 1.3360 or below 1.2440.
Technicals
Looking at the daily chart for September Euro futures, we notice the recent rally beginning to stall as prices approach psychological resistance around the 1.3000 level. Volume has started to ease the past couple of weeks, which may be a sign that recent gains were caused by little more than short-covering and not by new longs entering the market. The 14-day RSI briefly moved into overbought territory, but has now started to turn lower, with a current reading of 65.71. 1.3100 is seen as the next major resistance point in the September futures, with support found near the recent low just above the 1.2500 area.
Mike Zarembski, Senior Commodity Analyst
