Strategy Recommendation, nibble on bullish euro trades with micros.
|On the radar:
Currency market volatility is dismally low, but that could change. If it does, we suspect it will be positive for the euro.
GET LONG THE EURO CURRENCY FUTURES IN A SMALL WAY (MICROS/MINIS).
Currencies have been relatively rangebound but the major global theme has been "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". In our estimation, 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.
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 prospects. We have decided that keeping it simple with long futures, but on a small scale, is the way to go. 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 1 lot micro being traded but you can adjust for your preference.
You can purchase the March euro near $1.1220ish; 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; that said, an unexpected move toward all-time lows in the euro would create a drawdown of about $1,000 to $1,300.
The Zaner360 symbol is: M6EU19
The Margin on the trade is: $220
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