We’re opening a new bearish trade on CurrencyShares Euro Trust (FXE) due to several things moving the currency market. First, the Fed is trying to prep the market for the taper and trying to get them to refocus on the zero interest rate policy instead. That may or may not be successful, but we are skeptical that it will be. Bernanke included it in his speech last week and the Fed minutes seemed to indicate the same thing.
Second, the European Central Bank seems to be trying to prepare traders for a little shift of their own. Unlike the Fed, the ECB looks like they may start charging a negative interest rate on excess reserves held on deposit at the ECB. This strategy could help increase the flow of capital from the banks to the economy, and that is something that many traders expect the Fed to do at some point in the future as well.
Put together, these two issues are putting upward pressure on the dollar (because of the threatened taper) and downward pressure on the euro (because of the expected increase in the money supply from the banks). In the longer run, the ECB’s strategy looks like it could have some legs and may help the eurozone economy. However, in the short term, it’s likely to send the euro back down to support.
Recommendation: Buy to open the FXE January 133 Puts (FXE140118P00133000) at current levels.
InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.