The Euro broke its five session winning streak on Tuesday halting a recent two percent rally as a deal to rescue Greece may have spurred profit taking amid ongoing worries about the Euro-Zone as a whole.
The recent rally in the Euro versus the greenback was possibly due to investor perception that a deal would be finalized for the debt stricken nation. The Euro briefly rose above the psychologically 1.30 level; its highest level in a month, in Monday’s trading.
WHAT IT MEANS
This deal paves the way for the release of Greece’s urgently needed aid loans. Speculation that a deal for Greece would come to fruition may have been one of main reasons the Euro was able to notch its largest gain against the dollar since mid-September over the last six sessions.
NUTS AND BOLTS
After 12 hours of talks, international lenders agreed on a package of measures to reduce Greek debt by more than 40 billion Euros. Specifically, the plan projected to cut debt to 124 percent of gross domestic product by 2020. The Euro traded higher after news of the deal was announced. However, things turned sour as negative sentiment over Spain, Italy, and tougher austerity measures may potentially be keeping the Euro under pressure, especially against the Dollar. Near term support for the Euro lay at its 50 day moving average at 1.2917.
DOLLAR FOCUS SHIFTS TO D.C.
Conversely, the U.S. dollar’s direction in the coming weeks, in my opinion, will be heavily swayed by whether U.S. lawmakers reach a sweeping deficit reduction agreement by the end of the year. A deal needs to be done to avoid the so-called “fiscal cliff” of tax increases and spending cuts due to take effect at the beginning next year.
BIG CHALLENGES AHEAD
Congress and the White House, however, remain at odds on a deal, and the uncertainty that results may have boosted the appeal of the safe-haven dollar. If the past tells us anything in regards to the United States Congress, it is my contention that no deal will get agreed upon on concerning the “Fiscal Cliff” until the last minute.
SAFE-HAVEN
Further, it is my belief that safer haven commodities like Treasuries, the greenback, and possibly precious metals are where we might see investors park their money until we see some common ground met in Washington.
AN OPTION PLAY
Due to the aforementioned run up in the Euro over the last week, I feel that there is an opportunity to the downside to utilize puts in the Euro currency using January Options. Instead of looking to sell a rally using futures, a more conservative play might be buying the Jan 127 put for 30 points or a $375 risk, plus all commissions and fees.
KEY LEVELS
If we see a retracement off this latest run up in the Euro in the next few weeks, let’s say back to the 1.28 level, I would look for an increase of premium on the 127 put anywhere between 60 to 90 points. This could essentially double or triple the options value, provided you get a move lower by the end of the second week of December. Risk again on the trade is $375.00 plus commissions and fees.
RISK DISCLAIMER: There is a substantial risk of loss in trading commodities. Past performance is not indicative of future results. Only risk capital should be used. Losses from commodity investments may be greater than the initial investment(s). Commodity trading is not appropriate for all investors, and a commodity investment must be evaluated in light of the potential for risk of loss as well as the possibility of profit.
[Editors’ note: What do you think will happen in the next few weeks in Washington D.C.? Grand Bargain or Kick the Can? Have a question or comment for Lusk? Post a comment below.]
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