Greek Government Change Causes Euro Traders to Lose Faith
Today's Idea
The Euro may very well continue to face challenges as the Greek debt saga carries on. The weakness in the US and other economies also typically results in safe-haven greenback buying. Technically, the Euro is approaching the critical 1.40 level. A close below the 1.40 mark could result in a technical meltdown for the currency, as longs get squeezed out and shorts become emboldened. Some traders may wish to consider entering into a bear put spread by buying the August Euro 1.39 put and selling the August 1.36 put for a debit of 0.0080, or $1,000. The trade risks the initial cost and has a maximum profit of $2,750 if the underlying September futures close below 1.36 at expiration.
Fundamentals
Europe cannot seem to come to an agreement as to how to properly address the Greek debt crisis which is weighing on the Euro. The currency is under direct pressure because of the reshuffling of the Greek prime minister's cabinet and formation of a new government. What has troubled investors the most about the debt challenges facing Greece and other European nations is the indecision. Indecision within the country on how to handle the debt crisis and the avoidance of making the necessary reforms to remain solvent. Indecision among EU member states on how to handle Greece - more capital infusions or sharing the debt burden with bond investors. While European leaders squabble amongst themselves, yields on Greek and Spanish debt have jumped. This is a sign that investors have no taste for EU debt and could make financing more expensive. The Euro may continue to trend lower until some sort of accord is struck, but there is no guarantee that investors will be happy with a potential deal once it is reached. The US Dollar has been stronger in recent sessions, largely due to defensive buying because of falling commodity and equity prices. The US faces its own challenges. In addition to an economic slowdown, many investors are concerned about the debt ceiling debate in Washington and the potential jump in US bond yields once the Fed is done with its QE2 buying.
Technical Notes
Turning to the chart, it appears that the September Euro futures contract is in the midst of forming a potential double-top formation. The 1.4000 level is a crucial downside level for the Euro at the present moment, as a close below this level could send the Euro to the low 1.30's. The September contract settled on the 100-day moving average, and a close below the average would set a bearish tone, medium-term. Prices will likely have to take-out the relative high close of 1.4500 in order to recapture upward momentum.
Rob Kurzatkowski, Senior Commodity Analyst
