Irish Woes Stress Euro
Today's Idea
The European situation remains very unclear at the moment given, which could give investors a reason to convert to Dollars. Traders have been finicky, however, which could result in Euro investment if the market perceives the Irish debt crisis is contained. For this reason, some traders may wish to take on a bearish options position with limited risk. Some traders may wish to enter into a bear put spread, buying the December Euro 1.35 put and selling the December 1.33 put for a debit of 0.0050, or $625. The trade risks the initial cost for a potential gain of $1,875 if the Euro falls below 1.33 at expiration.
Fundamentals
The Euro currency has fallen under duress since the beginning of the month, propelled by the distressed Irish government. The sell-off was initially fueled by profit-taking in the Euro versus the US Dollar after the FOMC announcement. The situation in Ireland could create sovereign debt concerns for the entire Eurozone. The market has found a bit of support over the past two sessions on optimism that the bailout of Ireland could prevent a crisis across Europe. Whether this is wishful thinking or not remains to be seen. The Irish government has altered its initial stance and is now working with both the EU and the IMF to secure loans of tens of billions of Euros. While this may help solve the woes of the Irish, several EU nations could suffer a similar fate, as the global economic turnaround seems to have stalled for developed nations. The Euro could find support versus the US Dollar if the sovereign debt situation stabilizes and the Fed goes ahead with its aggressive QE2 plan. The Dollar has found strength by default. US economic policy is seen as flawed by many, but the rumblings in Europe have caused some investors to flock to the relative safety of the greenback.
Technical Notes
Turning to the chart, we see the December Euro contract finding support at the 1.35 level. The contract is still trading below both the 20 and 50-day moving averages. To make further headway, prices may have to cross back above these levels. Support just below the 1.33 level can be seen as key, as a breakdown below this level could send the contract tumbling into the mid 1.20's. The RSI is very close to reaching oversold levels, which could offer some near-term support.
Rob Kurzatkowski, Senior Commodity Analyst
