Will the Tide Begin to Turn in EUR/USD?

 

Good Afternoon, Friends. It’s been a busy week on my desk, and I am absolutely ready to call it a week and head for home. I did want to note, however, that the Euro, which has had a nice bounce versus the Dollar (among other currencies) since reaching 1.2624 on January 13, is now heading into what looks like a potential resistance zone around 1.33.

That’s still about a big figure and a half away, of course, but a 4.1% move in less than a month is nothing to sneeze at in currencies. There are still plenty of fundamental reasons to be a bit wary of entering new long EUR positions now (a slowing Eurozone economy, Greece, Portugal), and while there might be one more spike on news of a resolution to the Private Sector Involvement (PSI) issue in Greece, that could prove to be a signal to take profits, especially if after a quick pop it begins to fade.

It’s worth mentioning that although toward the end of last year the EUR/USD currency pair was highly correlated with moves in the S&P index (SPX), that relationship has become random. From a correlation coefficient of 0.85 on December 21, it has now moved to just over 0.50 (to be precise, 0.5149). In other words, all of the systems that were built to trade the SPX on the back of moves in the EUR/USD have now apparently outlived their usefulness.

As far as equities go, I’m about 50% invested at present, but somewhat defensively, as I am long a variety of ETFs, and short both calls and puts against them. This is called a “covered combo”, and it works best in a sideways to slightly uptrending market. The benefit is that the trader earns two option premiums; the downside is that if the market turns south, the premiums earned might not be sufficient to offset the losses on the long stock position, which if put of course becomes twice as large.

All of my short options have March expiries, so they have roughly a month and half to go. Time decay, which is one of the key benefits of the covered combo, will pick up once February maturities are in the rear view mirror, so the longer that nothing happens (although higher is perfectly fine) the happier I am. Oh, I also have an AAPL March bull put spread on; short the 325 puts, long the 315 puts, making $2 as long as the stock is above 325 at March expiry. Maximum risk, since the distance between the strikes is $10, and I earned a premium of $2, is $8, but I wouldn’t hang around that long if it began to move against me.

Let’s have a great Super Bowl weekend; here’s hoping that everyone comes back refreshed.

About the Author Brian Keith

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