Fed policymakers meet this week on June 28 and 29, and market participants by and large expect another quarter-point bump in the federal funds rate, to 5.25 percent.
The Fed is obviously examining economic data to help formulate their decision. I believe the housing market is going to be an important factor in this decision-making process into year-end. The housing market has cooled off after a string of record years. It's only one piece of data, but I think it's one of the most important numbers to watch is you are trading the currency markets based off of the Fed. I'm very interested in hearing the Fed's comments on the economy and any hints about the end of the tightening cycle when they release their statement this week. The markets are generally pretty good at reading the tea leaves and forecasting a change in interest rate policy before it actually happens. As a result, I see the euro taking flight, and the U.S. dollar backing down.
While the euro currency made a nice move higher from March to May 2006, the currency has been pretty flat since May, trading in a subdued range. However, I feel things are really going to spark in the fourth quarter of this year. During the course of the Fed's tightening cycle, we can see support on a weekly chart for the euro futures holding around 117, with major resistance at 130, although the market briefly supassed that level to reach a high of 135. If you'd like to trade futures off the daily chart, look to trade the range. The areas I'd focus on are buying at support around 126, and selling at resistance around 130.
Looking at a monthly chart, we can see that those traders with a buy-and-hold strategy last year would've done pretty well. See chart below.
As far as a trading strategy, I see a retest of the old 135 high by the end of the year, with the market perhaps moving even higher over a longer time frame. As I'm looking pretty long term, I would buy a December euro 132.50 call for about $1,200, excluding commission costs. There are other strategies you can employ based on a bullish outlook, based on your risk tolerance.
Euro futures trade at CME, via both open-outcry and electronic venues. These are essentially the same contracts, and are fungible. That is, you can buy the futures in the open outcry market and sell in the electronic-and vice versa. But which should you trade? I prefer the electronic market, which trades on CME's Globex platform, for its speed and transparency. In addition, the electronic market trades nearly 24 hours a day, from 5:00 p.m. to 4:00 p.m. CT the following day. The open-outcry market operates from the CME trading floor and is open from 7:20 a.m. to 2:00 p.m. During those hours, open-outcry and electronic trading occur side by side.
For more information on currency trading strategies, or other markets, please don't hesitate to contact me.
Ben Kim is a Senior Market Strategist with Lind Plus. For more information on this topic or others, he can be reached at 800-355-5757 or via email at bkim@lind-waldock.com
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