Look to sell the euro currency as the recession retains its grip on the eurozone, while there is optimism the U.S. may pull out sooner.
Buy the March euro currency 124 put at 60 points or less ($750 or less, not including commissions) and hold until expiration.
Many of the world’s financial markets are in turmoil and as central banks rush to provide liquidity to support their markets, and we see this as a selling opportunity in the March euro currency. We feel that the fear of a deep and prolonged recession within the Eurozone, tightened credit markets and concerns over bank stability will provide the fundamental market environment for lower prices.
The global financial crisis is continuing to depress growth within the Eurozone. Euro Stat reported the contraction of GDP within the Eurozone of 1.5 percent in the fourth quarter of 2008 vs. the third quarter of 2008. This represents a drop of 1.2 percent from the fourth-quarter 2007, and the sharpest contraction in quarterly GDP since the trading bloc’s inception. Nearly all of the Eurozone’s economies displayed signs of contraction last quarter. Germany, Italy, Spain and the Netherlands all experienced deepening economic contraction, while Spain officially entered its first recession in 15 years. The economies of Austria, Belgium, Portugal, and France also revealed serious contraction and are moving towards recession. Greece, Cyprus and Slovakia did not post negative growth numbers in the fourth quarter of 2008, but their GDP revealed slower growth. The weakening of the Eurozone economy and many analysts’ expectations for continued contraction throughout 2009 increases pressure upon the European Central Bank to cut interest rates at the March 5,2009 meeting.
ECB President Jean Claude Trichet has signaled that further cuts may be warranted and as inflation in the Eurozone has moderated, many analysts believe that the ECB may cut rates by 50 basis points. That would bring their key short-term rate to a low of 1.5 percent. The anticipated effort by the ECB to increase liquidity suggests that the March euro futures contract may be heading to lower price levels.
Slow economic growth is not the only major challenge for the market. We also feel that concerns over stability and transparency of western European banks and their eastern European bank subsidiaries may also cause a shift out of the euro and into other safe haven assets. The dislocation within the credit markets is also being experienced in the Eurozone; however, there is also significant concern as to the amount of leverage and exposure to counterparty risk should eastern European investments either default or subsidiary banks should fail. The default risk may fall to the western European parent bank and the country in which it is headquartered in. Austria, and several of its banks, have loans of about 230 billion euro to the Central and Eastern European area. This represents loans of more than 80 percent of Austria’s GDP, and the fear that either bank runs or failures may force the Eurozone to bail out eastern European banks may further pressure the Euro currency to lower levels. We feel that rallies in the March euro may be selling opportunities
The daily chart of the March euro futures reveals a bearish trend channel beginning with the high of 1.4145 on December 18, 2008. The market made a test early this week, rallying to 1.3000 but failing to close above the trend channel. The failure to break through resistance at the 1.3000 and the failure to break the trend suggests a continuance trade and test of support at the 1.2400 level. Traders can look to sell the March euro on rallies at 1.2800 or better and risk the trade to a close above 1.3000. Traders can look to take profits on a test of support at the downside objective of 1.2400. Option traders may also look to take advantage of this market by buying the March euro 124 put for 60 points or less, and holding the option until expiration.
Please feel free to call us for more information about this strategy, or for other market-related questions you might have.
Dennis G. Cajigas is a Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. Dan Faretta is a Market Strategist with Lind Plus. They can be reached at 866-631-6216. Dennis can be reached via email at email@example.com and Dan can be reached at firstname.lastname@example.org.
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