Is All Well Again in the EU?
Today's Idea
Although it is an old trading adage not to sell into a short-covering rally, some traders who believe that any rally in the Eurocurrency is an opportunity to get short the market may wish to explore option trading strategies to help limit the potential risk should the short-covering buying continue. Some traders with a longer-term bearish slant may wish to investigate the purchase of a bear put spread in Eurocurrency options. For example, with the March Euro trading at 1.3353 as of this writing, the March Euro 1.3350 put could be purchased and the March Euro 1.2750 put sold for about 0.0187, or $2,337.50 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $7,500 minus the premium paid which would be realized at option expiration in early March should the March Euro be trading below 1.2750.
Fundamentals
Just when it looked like the Euro was poised to test recent lows, all of a sudden many traders cannot get enough of the beleaguered currency, as its value vs. the U.S. Dollar has climbed nearly 5 full handles in the past 3 trading sessions. Among the factors behind this sudden turnaround was the "successful" auction of government debt by Portugal on Wednesday, as well as by Spain and Italy yesterday. Although all three of these countries have to pay several hundred basis points higher in yields than that of Germany for investors to be interested in its debt, pre-auction expectations were so low that even these high yields were seen as a pleasant surprise by many traders. However, there is some discussion as to who the buyers of this debt are, with some talk that the European Central Bank or possibly several Central Banks in Asia and South America were the largest participants in the recent debt auctions. In addition, after the announcement that the European Central Bank (ECB) left interest rates unchanged at 1%, comments from ECB President Jean-Claude Trichet that the bank would continue to monitor inflation and would not be opposed to raising rates if conditions warranted also added a bid to the Euro, as these "hawkish" comments sparked additional short-covering buying. Though it is too soon to tell if the Euro will be able to continue its recovery vs. the Dollar, it may behoove traders to remain skeptical that all is well once again in the EU and that the Euro's woes have all been solved.
Technical Notes
Looking at the daily continuation chart for Eurocurrency futures, we notice prices have now moved above both the 20 and 200-day moving averages. The 14-day RSI has formed a bullish divergence, as this momentum technical indicator failed to make a new low reading when the recent lows were made on January 10th. For the up-move to continue, prices have to move through rather strong resistance around the 1.3440 area. If we do get a daily close above this level, this could set-up a test of the November 22nd high of 1.3785. Support is found at the January 10th low of 1.2870.
Mike Zarembski, Senior Commodity Analyst
