Euro Currency: Correction Expected

Includes: FXE, UDN, UUP
by: Robert Schroeder


The Outright Monetary Transaction positive sentiment and global risk appetite continue to support the euro. The agreement in the US to avoid the fiscal cliff and market expectations of a deal to eventually increase the debt ceiling without a substantial fiscal tightening are also euro positives. At the same time, while US data has improved in various spots, the Fed retains a very loose policy stance and will continue their quantitative easing program. In contrast, the European Central Bank has priced out any further policy loosening, despite the Eurozone's recession and the highest unemployment rate in the last two decades. However, I continue to expect the euro to weaken. The recently hawkish ECB language is not justified by the data, in our view. Statements by Eurozone authorities that the euro is too strong reflect concerns that unfair competition could affect the recovery prospects. Markets seem complacent about the challenges in the periphery's adjustment. And I still believe markets underestimate the negative impact on US growth and global risk appetite of the US fiscal tightening this year.


On Friday the market spiked to above 137 for the first time since November of 2011. Although the market has been in a clear uptrend since September of 2012, Friday's spike followed by Monday's correction indicate that it was a classic short squeeze. The correction bottomed out at 134.62 and had a healthy bounce back to the 136 level. Although the market may go retest the highs at 137, I believe this bounce to be a selling opportunity.


I project the Euro at 1.31 at the end of Q1 and at 1.24-1.25 at the end of the year. Although I believe the market projections to be fairly aggressive to the down side with the recent bull trend, I believe there could be even more downside testing the July 2012 lows of 121.


I am buying June 130 puts (84 ticks) and selling April puts 130 puts (30 ticks) for a debit of 54 ticks (plus 2 commissions + fees). One of the toughest things in trading to do is pick a top. Also, markets don't usually collapse off the highs. Therefore, I am doing a timing play by selling the April premium and buying the June. I expect the market to trade sideways for a week or so longer before we see the clear downtrend begin. By doing the spread it makes the trade much more economical and is in line with my quarterly projections. For those that prefer not to do or understand spreads buying the June 132 puts outright is recommended.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.