Euro Vs. USD: 3 Things To Wait For Before Buying EUR/USD (UUP, EUO, ERO)
February 24, 2010 9:44 AM
A Global Fundamental Shift
There has been a large fundamental shift in the currencies of both the Euro and the U.S. Dollar (USD) over the past couple of months. All fundamentals aside, the EUR/USD spot rate has fallen from its peak of 1.6037 in 2008 to 1.3551 in 2010. This is a huge change in exchange rates.
For one, it looks as though interest rates are poised to rise in the U.S. - which would make shorting and selling U.S. Dollars much more expensive relative to a currency that is not raising rates as well. Secondly, the Euro has a lot of inherit risk embedded into it now as well. Greece might not be the only Euro Currency Based country to have problems.
That reason alone will make the Euro quickly depreciate relative to a safer U.S. Dollar. So if you are looking to get long on the Euro, the trend is definitely against you right now. I think you are going want to see these three things before risking any capital in a EUR/USD bounce.
Three Things To Look For Before Going Long EUR/USD
1) Greece stabilizes and their workers stop striking. Any ongoing unrest could trigger more damage to the country, and the Euro.
2) Reference the chart I uploaded. On the weekly chart, you want to see this downward trend line break. Once it breaks it could be a great trade to the upside.
3) Referencing that same chart, again on a weekly basis, you want to see the CCI cross from below -100 and close on the week above -100.
These will be the three signals to look for to get a better, and hopefully less risky, entry. You should never pick your bottoms; that goes for both dinner table manners and trading currencies! Getting long now is not worth the risk to reward.
Three Ways To Play It
1. Upon that confirmation, the most diverse play would be to see a fall in the USD and short PowerShares DB US Dollar Index Bullish (NYSE: UUP). UUP is actively traded with over 6 million shares trade per day. It's important to trade liquid instruments so you don't lose out on slippage from trades.
2. Another way to play the Euro bounce is with a more direct ETN. The Barclays PLC iPath EUR/USD Exchange Rate ETN (NYSE: ERO). This exchange traded note, which trades similar in fashion to an ETF, seeks to track the price and yield performance, net of expenses, of the Euro/U.S. dollar exchange rate.
3. ProShares UltraShort Euro (ETF) (NYSE: EUO) seeks to replicate, net of expenses, twice the inverse performance of the EUR/USD daily price change. So as the Euro rises, EUO falls at twice the pace. This could be a great short once we see our three signs to buy the Euro.
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