The DeCarley Perspective Trading Newsletter

Currency futures at a climax?

This newsletter was emailed to DeCarley Trading clients on July 12, 2011

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**There is substantial risk of loss in trading futures and options.

**Past performance is not indicative of future results

On the radar:

  • Currencies at a climax?


The Yen

The Yen has recently been named as a beneficiary on the Last Will and Testament of the Euro zone.  Each time business news stations mention the acronym PIIGS, investors seem to cash out their Euro holdings and move into what is being deemed as the safe-haven currency, the Yen. 

The Yen has also found buyers as money has flowed into Japan in aid and repatriation efforts to restore functionality to the economy in a post-tsunami world.  In more micro-economic news, a recently improved outlook by the Bank of Japan and a late afternoon downgrade of Ireland debt by Moody's on the 12th of July provided strong support for the market in the recent session.

Although each of these factors have worked in favor of the Yen recently, we have to wonder if this will be another case of "buy the rumor" sell the fact.  In other words, is all of the bullish news out?

Current pricing seems to ignore the implications of much slower growth in the country due to the March earthquake exacerbating Japan's reaction to the global slowdown.  Even more compelling, the Yen is sitting at prices not seen since "Magnificent March", in which the currency rallied to unfathomable levels  before several global governments stepped in to intervene.  Accordingly, there is ample reason to believe that another intervention could be possible...especially given the fact that Japan seems to be the most frequent offender of such a practice. 

Seasonality suggests the Yen should be finding a high within the next few days and the chart seems to be a bit overextended.  Accordingly, we favor the short side from current levels (about 1.2600).  Should the market move higher, the next "good" resistance will be near 1.2706 and above that it will be in the mid 1.2950's.  Minor support on the way down should come in near 124.10 but 1.2260 will be more reliable and we wouldn't be surprised to see prices move closer to 1.2100 (assuming the Euro problems temporarily fade into the background).  Open cilent position: Short August Yen 1.2850 call @ 28 ($350)

 Japanese Yen Currency Futures Trade

The Euro

Emergency EU meetings in regards to the possibility of debt default contagion have the European financial markets under pressure.  Despite last week's large recovery in U.S. equities, many overseas markets are trolling their lows.  The uncertainty and feeling of panic has bled into domestic markets via the currency market, specifically the Euro. 

The most recent sell-off, spanning from about 1.4300 to nearly 1.3800 in a matter of days has been the impact of fears of Italy becoming the "next Greece".  However, Italy is far from isn't a "peripheral" country it is the heart of the Euro zone, and thus the Euro currency.  Nonetheless, if the EU wouldn't let Greece go under (at least not in flames taking everyone else along with it), it certainly won't allow Italy.  In our view, a rightfully jittery market seems to have overcompensated for the current risk of Italy joining Greece and Ireland in the sovereign "junk" yard. 

Although European economic fundamentals are weak, arguably as bad or worse as that of the U.S., they do have the interest rate differential to fall back on.  The EU began raising interest rates in April from 1% (this was the first of such a move since the 2008 meltdown) and has currently pegged the rate at 1.5%. 

Along with being technically oversold and with favorable interest rates, the Euro has seasonal tendencies on its least for the next few weeks or so.  That said, in the long-term we are Euro bears but trading isn't about marrying a position or school of thought.  Our analysis suggests that the best short-term trade will be from the long side on dips.  Unfortunately, we never know how low the dip can go but here are some guidelines. 

1.3930ish offers relatively obvious technical support with 1.3820 being supportive as well...but the most valid level will be 1.3780 (compliments of a weekly chart) if seen.  If we are right about the turn, the Euro shouldn't run into resistance until the mid to high 142's but we think a retest of the 147 area could be in the cards if the markets shift focus from Euro debt to the U.S. debt (ceiling).  In fact, if things really get carried away we can't rule out a run to 1.4840ish...although it's hard to justify such prices fundamentally, it might not matter.  Naturally, if you are a bear, you might want to give the latter resistance areas a shot. Open client position: Short August Euro 1.3200 put @ 28 ($350).

Euro Summer 2011

DeCarley Trading

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**There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.



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