Change in Trend: Euro Currency versus the US Dollar

Name: Robert Schroeder Company: MF Global

Years Trading: 14 Favorite Movie: GoodFellas

For over two years the news concerning the Euro Currency and the US Dollar has been almost all one sided, with the Euro strengthening against the dollar. This trend has produced a substantial rally. In November 2005 the Euro made a four year low at 116.61. Since then the incline has been nearly straight up, topping out November 2007 @ the price of 149.80. The market has since tested that area twice, early this year when it traded @ 149.16 in January & 149.46 on February 1. Since then there has been a break in the Euro down, going as low as 143.55. While these sell-offs have proven time & time again to be favorable buying opportunities, I am suggesting that this is an actual change in trend and will continue for the near future. I would say that 90% of my trading ideas are technical and only 10% are based on fundamentals. Although this trade can be supported by both technical and fundamentals, my ratio on this idea is a little closer to 50/50.

Weekly Euro Chart

Technically we know where the current resistance level is in the Euro. The market has tested the 149 handle a few times now and has been rejected every time. The market is currently only trading three points (146 level) off these highs. In the big picture of the possible market drop, this level can still be considered at or near the overall highs of the market. The daily chart is also showing a sell signal when you add exponential moving averages. Using the default values of 13 & 55, the averages have just started to cross signal a bear market. This is significant since this is the first time this signal has changed since September of last year. When the exponential averages crossed to the upside in September, the Euro rallied from 136.09 to 149.80 in November. That is over a thirteen point move from low to high in just 3 months. Of course this does not assure that the market will now see a similar move to the down side, but it does suggest it is possible. Of the markets I follow, I find currencies to be one of the best trending markets out there. This trend change may or may not become a reality; however, buying put options in this situation produces an attractive risk-reward relationship that I would be looking for in any trade.

Daily Euro Chart

There are fundamental reasons I see that may point to a slide in the Euro. It is clear the US Fed believes the way to economic recovery is by cutting rates. Cutting rates lowers the cost of borrowing, which in turn should produce growth. The Fed has already cut rates 2.25 percentage points since September and has an overnight target rate of 3 percent. The European Central Bank (ECB) has been reluctant to follow, keeping its interest rates at a six year high because of inflation concerns. However, it is becoming clear that the sub prime problems that we are seeing in the US are not just ours and are a global problem. Recent German manufacturing orders fell the most in 5 months during December, adding to evidence the economy is losing momentum. On Dec. 6 the ECB projected an economic growth of only 2 percent; this comes after 2.6 percent in 2007. These tendencies should continue. The longer the ECB delays rate cuts, the worse for the Euro-zone economy. I believe it is just a matter of time before the ECB is forced to cut in order to spark growth. These cuts should weaken the Euro in the coming months.

Overall I see the Euro possibly trading as low as the 136-134 level in the next 3-6 months. I am recommending the purchase of both 140 April puts for 47-52 ticks which is $588 to $650 per option & June 135 puts for roughly the same price. The April options expire on April 4^th and the June options expire on June 6^th. For those traders that do not like trading options, futures can be sold anywhere between the 145-146 handle which is where the market is trading currently. Any rally above the old highs or in the 150 level should put any bear ideas on hold and all shorts should be exited. Please fell free to call or email me with any questions or comments @ 800.888.6484 & rschroeder@mfglobal.com .

Futures trading involves risk of loss and may not be suitable for everyone .

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