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Euro Ready to Reverse?

07/26/2019 9:27 am EST

Focus: CURRENCIES

Carley Garner

Senior Strategist & Broker, DeCarley Trading

The dollar has been in a 10-month rally vs. the euro. It may be time for a change suggests Carley Garner.

Currencies have been relatively rangebound, but the major global theme has been to buy the dollar and sell the euro. There are a plethora of reasons for this but one of the major driving factors is the interest rate differential. Global investors believe they are far better off buying the dollar to purchase US-backed securities than they are buying euro and earning negative yields on fixed income products. However, there comes a time when a fundamental story becomes conventional wisdom; at this time, the market generally starts seeking another story.

We could be nearing such an inflection point in the currency market. If so, the euro could be putting in a significant low and the dollar a significant high in the coming weeks. To be fair, we thought this would occur far before today, but with the euro approaching trendline support and oversold levels, now is a probably a favorable time to express such an opinion.  That said, we wouldn't bet the farm on trying to find a bottom in a market that has failed to move much in over a year.

downside euro

We like the idea of playing the upside in the euro in a tame fashion. We explored the idea of selling put spreads, but the lack of volatility has created an environment that is dangerous to premium sellers because it requires selling options that are too close to the money or collecting too little premium for the risk. We have decided that keeping it simple with long futures, but on a small scale, is the way to go. Everyone is talking about the Micro E-mini S&P 500 futures,  but there is also a micro-sized currency futures contract.

Depending on account size and risk tolerance, you could consider purchasing micro euro futures contracts ($1 per tick with a 10,000 unit size), mini contracts $6.25 per tick with a 50,000 unit size) or perhaps a full-sized contract ($12.50 per tick and a unit size of 100,000). Going forward, we are going to assume a one-lot micro being traded but you can adjust for your preference.

You can purchase the March euro near $1.1220; today's low was $1.1145. We expect that low, or at least its vicinity, to hold. If so, the euro should at least head toward the upper end of the trading range near $1.1375. If this level gives way, we could have something (the $1.1500 area is likely but the $1.2000 would be possible). Playing with the micro, a move from here to $1.1500 would be a profit of somewhere between $250 and $300 per lot depending on fills; a move to $1.2000 would see a gain of about $750 to $800 before transaction costs. The downside risk is theoretically unlimited (we prefer playing without stop loss orders due to the small contract size); that said, an unexpected move toward all-time lows in the euro would create a drawdown of about $1,000 to $1,300.

The major benefit to trading the smaller sized contracts is that you could trade more contracts and take small profits while moving your stop loss up ta breakeven level and maintaining the opportunity of a much larger move. The downside is higher brokerage and transaction costs per unit of risk.

Carley Garner is the Senior Strategist for DeCarley Trading, a division of Zaner, where she also works as a broker.  She authors widely distributed e-newsletters; for your free subscription visit www.DeCarleyTrading.com.  She has written four books, the latest is titled “Higher Probability Commodity Trading” (July 2016).

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