It is hard to believe the relative strength is coming from the Euro these days. The creaky new currency is having a bit of a run after several positive steps the Euro Zone ministers have taken to build stability.
The Greeks will be refinanced and will start buying back privately held debt. There will be a small grace period on some interest and new cash to keep things going. How long this will hold is anyone’s guess, maybe a year or more, but the Euro has been making steady gains and that ultimately is the test. The Spanish banks will be going through a TARP like rehab so the immediate liquidity shocks seem to have subsided. Now the Greeks and Spanish get to sit and watch our politicians play out our version of Romeo and Juliet.
A LITTLE SHAKESPEARE
Why did I pick that tragedy? Well, because our politicians are stubborn enough to make sure everyone loses. Like the Capulet’s and Montague’s both sides are not really thinking about the consequences of what will happen from their feuding. They jawbone but the solution is relatively easy, more revenue and less spending, and refuse to do it. Most likely the Fiscal Cliff will solve our tax and spend problem and as they say in the theater close curtain. That makes trading very difficult short term since we have a directionless market with occasional fits of panic. My trades of last week, long VIX call spreads and long FB juice, were both suited to what I see from here to Dec 31st. Another idea would be using time spreads to collect some theta in the meantime as we go nowhere. The question is on what?
LOOKING AHEAD
That brings us back to the Euro. The CurrencyShares Euro Trust (FXE) is trading at very low implied volatility which is one of my first qualifiers for a time spread.
Next there is a little backwardation in the term structure which is no doubt a symptom of the Shakespearean tragedy unfolding in Washington. I don’t think the Euro will take off but bump up on fits and starts while we get our house in order. A two strike (around 131 or 132) out of the money call time spread in the Dec/Jan terms should do the trick while our play unfolds.
THE TRADE
The trade should look like buying the FXE Dec/Jan 132 call spread.
Disclosure: I am bidding for a position in FXE.
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What happened to the euro this morning?
