April employment data out of the eurozone show that the region continues to face problems at unprecedented and alarming levels. The 17-member region posted an unemployment rate of 12.2%, setting a new record and indicating that before the end of the year, the total number of unemployed will likely reach 20 million. This number nearly matches the total population of Australia, so the potential problems here are clear. This means the European Central Bank still faces some critical decisions (namely in the direction of implementing negative deposits rates), and most of the potential scenarios call for trading against the euro in favor of its U.S. counterpart.
To do this, traders can sell short the Barclays PLC iPath EUR/USD Exchange Rate ETN (NYSEARCA:ERO) or in the CurrencyShares Euro Trust (NYSEARCA:FXE). This strategy can also be implemented by buying PUT options in either of these instruments (and this can help to investors to avoid some of the potential volatility created by illiquid summer conditions). Both of these instruments are reflective of the movements seen in the euro currency and will benefit from any further downside in the EUR/USD. Purchasing PUT options in either of these instruments offers some risk benefits when compared to more traditional long positions in the ProShares UltraShort Euro (NYSEARCA:EUO), which doubles the inverse of price action seen in the euro. But short selling these instruments as the EUR/USD trades into key psychological levels (at $1.30) is also a viable strategy to play the expected weakness in the euro.
For time frames, these bearish positions in the euro should be taken on one-month time horizons, as the summer months are likely to show a continuation of the bearish performance seen late in the second quarter.
Long Term Weakness Expected
With the latest unemployment numbers rising into uncharted territory, it is clear that the region's debt crisis will not find resolution any time soon. Thus far, governments have been forced to make cuts in budget spending and to implement tax increases as a means for generating revenue. These actions have weighed on both business and consumer sentiment, and this limits the potential for growth into the end of the year.
Greece and Spain continue to be major areas of weakness, with unemployment rates in both countries continuing to rise near the 30% mark. For the younger demographics, the data is even more alarming, as nearly 2/3 of those aged 16-25 in Greece are unable to find work. The main problem with these trends is that they create a climate that lends to permanently entrenched unemployment for large cross sections of the population, and this can easily become a key obstacle for growth going forward.
Seemingly Endless Recession
While it can be said that the economic weakness is not evenly dispersed across Europe, a chain is only as strong as its weakest links. Greece continues to be one of the most troublesome areas, and the country has been unable to emerge from recessionary conditions for six years. We are now in the midst of the longest eurozone recession since its inception in 1999.
When we compare these trends to the recovery seen in the U.S., marked divergences can be seen. The U.S. economy is now well below its peak unemployment rate of 10%, and this is now the main argument for why the Federal Reserve can now signal an end to its quantitative easing program (highly bullish for the U.S. dollar).
The latest unemployment data is conducive for selling short (or buying PUT options) in the CurrencyShares Euro Trust. We are now seeing a head and shoulders pattern developing on the long term charts, so any continued weakness here should lead to accelerating bearish momentum. Look to enter into sell positions in FXE at $128.80.
For those traders looking to play the expected weakness from another perspective, safe haven buying in the U.S. dollar lends to buy positions in the PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP). Price behavior is now showing a series of higher highs, and traders should look to establish long positions in UUP on any dips to $22.10. The fund is likely to see renewed buying as a safe-haven alternative to the euro during the summer months.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.