Last week currency traders celebrated what was advertised as a resolution to the European default crisis by selling the dollar and getting long the Euro. Alas as the details, or lack of same, on the Greek "selective default" emerge, it seems the dollar is back to being the worlds' tallest midget, regaining some of its appeal relative to the Euro. All of which is a long way of saying the U.S. dollar's recent decline, and its bullish implications for stocks, ended before it began.
The bottom-line is the Euro vs. Dollar ratio remains between 1.45 and 1.40. It also remains important as demonstrated yet again thus far on Thursday with both U.S. stocks and the Euro moving higher. But Breakout isn't here to tell you what the weather is, we're hear to tell you what it's going to be. To that end we welcomed Jon Najarian, co-founder of OptionMonster.com to help tell us where we're going and how to profit from it.
Najarian says the weakness of the Euro comes not just from the flimsy nature of last week's deal but also the apparent resolve of the two biggest dogs of the EU pack, France and Germany, to stick with what's not working. "There's the political will in Europe to hold this union together," says Jon with a dark chuckle.
Nicolas Sarkozy and Angela Merkel's determination to force French and German citizens to support the PIIGS to the detriment of their own countries may be equal parts disturbing and weird, but it does have economic implications in the states. Specifically it suggests the Euro has regained it's status as the world's worst Super Power Currency, potentially driving the dollar higher. A move higher by the dollar would be unambiguously negative for commodity prices, particularly gold and silver.
In an attempt to cash in on an anticipated move lower for the Euro, options traders are buying puts (bearish bets on a drop in price) in both gold and silver. This can be seen both through the volume of the put contracts and the volatility, or premium over intrinsic value, options traders are willing to pay. This activity is more run of the mill for silver, which has become a trading vehicle in addition to a semi-precious metal than it is for pure, precious Gold. Gold owners are a "slow to correct crowd" notes Najarian, confirming the anecdotal observation of a certain passion and conviction among holders of the ancient currency.
Najarian is long gold puts on a short-term bet that gold could move lower both on dollar strength and on a technical consolidation of a rather glorious but slightly extended chart. As a long-time holder of the (GLD) I would welcome such a correction, even if it meant GLD bears taking a short term victory lap.
As is always the case readers are welcome to their own opinions and invited to share in the comment section below.