It must be difficult to stop a trending market once it gets going, as evidenced by the recent strong performance in the Euro -- especially vs. the U.S. Dollar. December Euro futures are trading at their highest levels since mid-April, despite word that Ireland's government debt is expected to soar to 32% of GDP, as the government continues to struggle to support its banks. In addition, Moody's downgraded the credit rating of Spain to AA1 due to the country's weak economic growth outlook. Normally this news would send traders fleeing the Euro, but traders now seem unfazed by the continued economic difficulties being faced by E.U. countries, and they have instead turned their focus back to the potential of a next round of quantitative easing by the Federal Reserve. However, a slew of positive economic data for the U.S. on Thursday may be the catalyst for an end to the Euro's ascent. The biggest favorable Dollar development was the much better than expected survey of Chicago-area purchasing managers, with the ISM's Chicago Business Barometer coming in at a surprising 60.4 reading for September, which is up from 56.7 in August, and significantly above the 56.0 reading many economists were expecting. This strong reading came on top of the slightly better than expected estimate of second quarter GDP, which came in at an annual growth rate of 1.7%. A look at the most recent Commitment of Traders report shows large speculative accounts moving to a net-long position in the Euro as of September 21st. This data could explain the Euro's recent strength, as short-covering buying looks to be the catalyst for the rally. As prices continued to climb, trend-following traders have jumped on the bullish Euro bandwagon, adding fresh buying despite rather troubling fundamentals.
Traders who are anticipating the Euro rally will come to an end may wish to explore selling calls in the Eurocurrency options with strike prices above chart support at the 1.3850 area. An example of such a trade would be selling the November Euro 1.4300 calls. With the December futures trading at 1.3615 as of this writing, the November 1.4300 calls could be sold for about 0.0030, or $375 per contract, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in November should the December futures be trading below 1.4300. Given the potential risk involved in selling naked options, traders should have an exit strategy in place if the trade moves against them. An example of such an exit strategy could be to buy back the short options before expiration if the December Euro futures close above chart resistance at 1.3819.
Looking at the daily continuation chart for the Eurocurrency futures, we notice that the value of the Euro has corrected over 50% from the yearly high of 1.5142 to the low of 1.1874. Prices are now above both the 20 and 200-day moving averages, and further gains could cause the 20-day MA to cross above the 200-day MA, which could be interpreted as a bullish technical signal. The 14-day RSI has moved into overbought territory with a current reading of 75.43. The March 17th high of 1.3819 looks to be the next resistance point for the Euro, with support seen at the 200-day moving average currently near the 1.3220 area.
Mike Zarembski, Senior Commodity Analyst