Euro Still a Sell, Silver Setback Seen

03/11/2009 10:23 am EST

Focus: FUTURES

The euro currency has been in a downward cycle, and I remain bearish as the euro zone economy looks a bit behind the US in terms of measures to restore growth. On March 5, 2009, the European Central Bank (ECB) cut its key short-term lending rate to a record low of 1.5%, but it still remains above the Bank of England’s rate of 0.5% and rates of near zero in Japan and the US. I believe the ECB will cut rates back further, but at a more subdued pace. The general market view is that while we are experiencing a global recession right now, the US is in a much better position than the EU to pull out of it sooner.

Words and actions from the ECB have failed to boost confidence, and the most recent economic reports out of Europe are somber at best. The French unemployment rate rose to 8.2% in the fourth quarter 2008, and is expected to show worse numbers in 2009. German retail sales, which were expected to rise in January, declined 0.6%.

The US dollar has benefited from a flight to quality bid, and I think that trend should continue. My long-term outlook is for the euro to touch $1.1655 (June futures are currently trading near $1.27940). I recommend buying the June 2009 euro puts at 122 for about $2,750 (not including commissions), which represents your defined risk on the trade. You can consider a bearish put spread if you’d like a less expensive trade. You could buy the June 123 euro put and the sell June 121 puts against it for a cost of about $750, not including commissions. That’s your defined risk on the trade. Your maximum profit potential would be $1,750 per spread (not including commissions) if the market is trading below $121 by the date of expiration, June 5, 2009.

In the more short-term, I’d look to sell rallies near resistance points. I wouldn’t be surprised to see a corrective bounce, but this market has had trouble breaking past its nine-day moving average and to me looks technically bearish. I would caution that this market has been volatile, so you have to be careful as you trade to ensure proper risk management is in place.

Silver

Silver prices pulled back sharply Monday, March 9, 2009, as the May COMEX contract fell 2.9% to $12.94 an ounce. I think silver is overbought and is likely to further deflate as we continue to see slowing in the economy. Silver has actually outperformed gold this year, but unlike gold, silver is an industrial metal. I see further slowing in the economy, and silver should see a setback, bringing it to $10.50 or even under $10. There’s been a big gold rush as investors bought gold as a safe haven, but I think silver got ahead of itself and is going to be more subject to less supportive fundamentals.

Right now I recommend selling the May $14.50 silver calls. If the market closes below $14.50 at expiration on April 27, you would collect $2,500 per contract, not including your commission costs. Keep in mind that while selling options offers you the ability to collect premium, there is a potential for unlimited risk if the market moves against you.

By John Caruso of Lind-Waldock

Related Articles on FUTURES