Chart of the Day: Making buck$ on the euro

Economists aren’t expecting the sovereign debt problems plaguing Europe to go away any time soon, and this bearish outlook is wreaking havoc on the euro, the continent’s major currency. The following weekly chart of the FXE, the euro trust fund, shows how important support and resistance levels are for the currency.

Euro Chart 2-8-10

You can see how key support levels were violated during the 2008 global credit crisis. The FXE put in a double bottom late in 2008 at the $125 major support level before climbing back up. It took a second turn for the worse beginning last November, just around the time the US dollar staged its own reversal to the upside.

How to profit from a euro decline
Where’s the euro heading now? If you believe the European crisis isn’t close to being cleared up, a test of the $125 level is certainly not unreasonable. Now, how to play it…

Without setting foot in the futures market, you can still get a lot of bang for your buck (sorry!) by buying either of the double short euro exchange traded instruments, the DRR or the EUO. (You can buy these in your IRA accounts, FYI.)

The DRR is an ETN while the EUO is an ETF. The difference between them is the manner by which their investment objectives are achieved. Chartwise, they both perform similarly, although the DRR seems to exhibit more intraday volatility.

What type of return might we expect? If the FXE falls to $125, that drop represents an 8% decline from today’s closing price which translates into an 16% profit on the double-shorts. And if the euro is indeed headed downward, the general sentiment is that it will happen sooner rather than later, meaning that you shouldn’t have to wait too long to book your profit from this trade.

Update 2/11/10:   A reader wrote in saying that I forgot to mention another possible play using bullish options positions on the FXE.  The FXE, like many ETFs, does offer options.  Its the near-the-money strikes are quite liquid and may offer options traders another attractive alternative to futures.

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