Euro yo-yo
Monday, November 21, 2011
With outside forces such as the repatriation of Euro's by European banks supporting the Euro, it may be difficult for traders to hold an outright short position in the currency based on its current weak fundamentals. Some traders who are anticipating a weaker Euro going into 2012 may perhaps wish to explore the purchase of a bear put spread in Euro futures options. For example, with the March Euro trading at 1.3477 as of this writing, the March 1.34 puts could be bought and the March 1.24 puts sold for 0.0248, or $3100, not including commission. The total investment in the puts would be the maximum risk on the trade, with a potential profit of $12,500 minus the premium paid, which would be realized at option expiration in early March should the March Euro be trading below 1.2400.
Fundamentals
Markets hate uncertainty, and the economic situation in Europe is anything but certain, causing financial markets to turn choppy, as traders have little to grasp onto regarding any solution to deal with the debt crisis. Markets such as US Treasuries, the S&P 500, and even Gold have seen volatile daily trade with little movement in the overall longer-term trend. Even better economic reports out of the US, including the four-week average US jobless claims falling to 7-month lows, and an increase in US single family housing starts are failing to garner any enthusiasm, as all eyes are focused on events across the Atlantic. Though the Eurocurrency has been in a downtrend during the past several weeks, its value vs. the US Dollar have held up relatively well, considering all the turmoil during the past several days. One reason to explain the Euro's resilience could be the repatriation of Euro's by European banks, who may be liquidating investments outside of the Euro zone to help shore-up their weakening balance sheets. This inflow of funds back into the Euro is supporting the currency that would otherwise face the potential for increased investor selling given the current crisis. We saw something similar happen to the Japanese Yen after the devastating earthquake earlier this year, where the Yen actually rose in value due to Japanese businesses bringing back Yen into the country from overseas investments to help pay for the recovery efforts. However, this support for the Euro may not hold for long should investors and traders lose further confidence that EU leaders can eventually come to terms and actually deal with the debt situation and not just kick the issue further down the road.
Technical Notes
Looking at the daily chart for the December Euro, we notice the market starting on its downward move with any rally attempts being met by new sellers. Prices are now below both the 20 and 200-day moving averages, and momentum as measured by the 14-day RSI has turned weak, with a current reading of 42.39. The next major support point is not found until the October 4th low of 1.3142, with resistance found at the 20-day moving average currently near the 1.3760 area.
Mike Zarembski, Senior Commodity Analyst
