Euro Woes Continue

Today's Idea

The Euro currency could continue to suffer setbacks due to mounting debt concerns facing multiple nations. The sharp philosophical turn in tackling Greece's debt, along with the IMF potentially being paralyzed due to its head facing criminal proceedings, may shake investor faith rather than restore it. The chart shows prices correcting sharply, with the currency falling over 7 handles, and a breakdown below 1.4000 could potentially shake longs out of the market. Some traders may wish to short the Euro currency future on a solid close below the 1.4000 level, with a downside objective of 1.3600 and a stop loss order at 1.4200. The trade risks roughly $2,500 and the maximum profit is roughly $5,000. Some traders may also consider adjusting their stop loss to 1.4050 in the event that the currency should trade below the 1.3800 level.

Fundamentals

The Euro currency continues to slump versus the US Dollar, largely due to the mounting questions surrounding Greek debt. The bailout has simply not worked to this point. The financial system in Greece has not been restored to healthy conditions at this point, and it is difficult to see a scenario where this would happen without a full overhaul of the nation's debt. For the first time, at least publicly, the EU has floated the idea of renegotiating terms with bondholders. This is a massive shift from prior bailouts, which have relied on simply injecting cash into troubled economies. The exact terms have not been discussed, but a less than favorable restructuring for bondholders could cause an exodus in EU paper by bond traders. While this strategy could be the only long-term solution for Greece, the seeds of doubt could be planted with fixed income traders, shaking investor confidence in the Euro currency. The debt situation could overshadow otherwise improving economic conditions, and also the fact that the ECB will likely begin raising interest rates sooner and more aggressively than the Fed. Currency traders are closely watching the terms of the new Greece plan as a possible blueprint for how it will handle Ireland and Portugal's debt if those nations suffer further setbacks.

Technical Notes

Turning to the chart, we see the June Euro futures contract pushing close to the 1.4000 level, which is a key psychological and technical level for the currency. A close below this level suggests that prices could come down to test support at 1.3500. The contract has also traded below the 50-day moving average for five consecutive sessions, which is a negative technical sign. The 100-day moving average also resides just below the 1.4000 mark. A close below the average could result in further technical selling, as it would suggest the longer-term trend in the Euro has turned negative. The recent selling pressure has brought the RSI down to oversold levels, which can offer some technical support and slow selling pressure for the time being.

Rob Kurzatkowski, Senior Commodity Analyst