Euro Revival Continues
Today's Idea
Once a currency begins to trend, it is difficult to reverse the momentum, baring a major shift in the fundamentals. That being said, the March Euro is up against some technical resistance near the1.4250 area that could be difficult to overcome. Some traders who are moderately bullish on the Euro but believe that the 1.4250 area may hold in the near-term may wish to explore buying a bull call ratio spread. In this-type scenario, a trader would buy a near-the-money call and then sell multiple out-of-the-money calls using the proceeds from the short options to help defer the cost of the option purchased. An example of this trade would be buying 1 March Euro 1.39 call and selling 3 March Euro 1.43 calls. With the March futures trading at 1.3821 as of this writing, this ratio spread could be purchased for about 0.0056, or $700 per spread, not including commissions. The maximum gain would occur at expiration during the first week of March should the March Euro futures close at 1.4300. Here the profit would be $5,000 minus the premium paid for the spread. Given the potential risks involved in selling naked options, traders should have an exit strategy in place should the trade move against them. One such strategy would be to close out the trade before expiration should the March Euro futures close above 1.4400.
Fundamentals
The demise of the Euro has once again been put on the back burner, as it appears traders now believe that “all is right” again in Europe, as the Eurocurrency has risen to 2 ½ month highs vs. the U.S. Dollar. Much of the recent gains can be tied to the belief that the European Central Bank (ECB) will eventually raise interest rates this year, as fears of rising prices will force the central bank to focus on curbing inflation. In addition, the lack of major turmoil in Egypt, as protests have been fairly peaceful so far, have traders focusing on “riskier assets” once again, which is viewed as supportive for the Euro. Some good economic data out of Germany, where the unemployment rate is near 20-year lows, has also supported the Euro and has overshadowed, for now, the continuing debt crisis in some of its member countries. Recent economic data seems to suggest that the U.S. economy is also beginning to show some meaningful signs of improvement. However, the fact that the Federal Reserve is steadfastly determined to keep interest rates low for the foreseeable future -- or at least until we start to see the U.S. unemployment rate start to show some meaningful declines -- has traders looking towards the Euro and the potential to earn higher rates of return if the interest rate differentials begin to widen in the Euro’s favor.
Technical Notes
Looking at the daily chart for March Euro Currency futures, we notice that prices broke out of the recent consolidation range once the downtrend line, drawn from the November 4th highs of 1.4250, was broken. We also notice a bullish divergence had formed in the 14-day RSI when this momentum indicator failed to make a lower reading at the recent lows of 1.2870. Though prices have climbed steadily for the past few weeks, trading volume has started to wane a bit, which may be signaling a bout of short-covering buying instead of new longs being initiated. The 14-day RSI has also moved above the 70.00 level, which historically has signaled a market has become overbought. The next major resistance point is not seen until the 1.4250 area, with support seen at the recent low of 1.2870.
Mike Zarembski, Senior Commodity Analyst
