Several weeks ago I highlighted a potential "business hedge" that involved selling a Euro FX futures contract to offset negative impacts that a firming dollar and the threat of rising interest rates could have on your farming operation. This installment is a update to that opportunity.
Today's featured question:
Do you have a target when to get out of this "business hedge?" What should a person look for when contemplating offsetting this position? When will we know?
When doing some basic technical analysis, the next landing area for the euro futures contract is from 140 to 130. On the weekly chart, 140.53 would represent a 25% retracement of the rally from the 2000 low, while 138.24 would be a 50% retracement of the move up from the 2005 low. Beyond that, support is at the 2004 high of 135.78 and then 130.33, which would be a 38% retracement of the rally from the 2000 low. It's very possible the euro could pause in this area – potentially for an extended period. A drop below this level would open the downside to the 120 to 115 level, which would be the next area of support on the weekly chart..
So, there's some more near-term downside for the euro, but the bulk of this initial move could be about complete. At this stage, I wouldn't want to see the euro futures contract post consecutive higher closes on the weekly chart. That would be the signal to exit the hedge and then reevaluate.
Because this is a hedge against rising interest rates and the negative impact a rising dollar will have on your farming operation, the position doesn't need to be actively offset. It is the offset. If you get nervous, I guess you could buy gold, but that would be somewhat overkill, in my opinion.
It's fairly safe to say the euro has put in a major top and the dollar has put in a major low. But both still have a long ways to go before nearing "par.” So, the "easy” money may have already been made.
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