What a Way to End the Week
Friday, November 4, 2011
The European Central Bank surprised the market by lowering the benchmark interest rate by 25 basis points to 1.25%. This would normally be considered bearish for the Eurocurrency, but its value vs. the US Dollar is little changed as of this writing. There is some talk among analysts that if the current Greek government were to dissolve, we may see a surprise rally in the Euro, as the fall of the government may take the Euro referendum off the table. It should come as little surprise that Euro option premiums are quite rich given the uncertainty surrounding Greece. For the year, the Euro futures have traded in a range between 1.4925 on the upside and 1.2870 on the down side. Some more aggressive traders may wish to consider exploring selling deep-out-of-the-money strangles in near-term Eurocurrency futures options. For example, with the December Euro trading at 1.3788 as of this writing, the December 1.495 calls and the December 1.23 puts could be sold for a credit of about 0.26, or $325 per spread, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration in early December should the December futures be trading above 1.2300 and below 1.4950. 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 exit strategy would be to buy back the strangle prior to expiration should the option premium move to 2.5 times the premium received for selling the strangle originally.
Fundamentals
There was certainly no lack of economic events this week, with the conclusion of the FOMC meeting on Wednesday and a vote of confidence vote by the Greek parliament, as well as the monthly Non-Farm Payrolls report for October. Starting first with the comments from the 2-day FOMC meeting, the Fed lowered its growth projections next year to a range of 2.5% to 2.9%, which is nearly 1% below its June forecast. In addition, the Fed's outlook for employment looked tepid, with an estimated unemployment rate of near 8.6% by the end of 2012, down only slightly from the 9.1% currently. However, the mood of the voting members of the FOMC also changed, as former "hawks" in the FOMC did not dissent to the Fed's current accommodative policies. In fact, the one lone dissenter was looking for even more accommodative policies. This may signal that the Fed is not planning on easing policies further this year, which has dashed market participants' hopes for some sort of QE3. If there was a bright spot, it was the ADP private employment report for October, with the firm reporting that 110,000 private sector jobs were created last month. This was 10,000 more jobs than pre-report estimates and may signal some slight optimism on the employment front. For Friday's Non-Farm Payrolls, the average estimate is calling for a net gain of 85,000 last month, though some analysts have upped their estimate to over 100,000 jobs having been created. The unemployment rate is expected to remain steady at 9.1%. The real wildcard remains Greece, where the current government remains in flux, and where the possibility remains that Greece may be the first country to leave the monetary union.
Technical Notes
Looking at the daily continuation chart for the Eurocurrency futures for the past 12 months, we notice how the market turned choppy starting in September, after prices broke below support of the summer-long consolidation pattern. The short and long-term trends are in conflict, as prices remain below the 200-day moving average (MA) but are trying to stay above the 20-day MA. The 14-day RSI is favoring neither bulls nor bears, with a current reading of a very neutral 50.45. Near-term support is found at the 11/1 low of 1.3604, with major support not found until the 10/4 low of 1.3142. Major resistance is found at the 10/27 high of 1.4241.
Mike Zarembski, Senior Commodity Analyst
