This is a quick update on the euro currency. Though I speak about FX often in appearances on CNBC, Bloomberg, and ForexTV, I haven’t written about it much lately. My last update is still worth reading because the themes of Greek instability, sovereign balance sheets, and interest rate yield curve shifts are still very much front and center.

When I called for a sell-off in the euro in early December, the catalysts were the following:

1. Euro reaching $1.50 was a target I had set in mid-2009, but I also believed it would not be able to sustain above that level because the Europeans didn’t want a strong currency any more than the next hobbled economy.
2. Euro was always the weak follower of risk appetite, more along for the ride with Aussie and Canada who led the charge into all higher-yielders, including emerging markets currencies. This carry trade would not last long with Eurozone fragility and sovereign debt issues finally front-page headlines.
3. Breaking down through the 10- and 20-week moving averages was a sure sign of weakness. I called for a bounce off of the 200-day (40-week) moving average and that’s exactly what we got from mid-December to mid-January where you could have sold the euro as it touched the rapidly falling 10-week.

Now, let’s look at the chart and see what damage has been done to determine where we go next…

Click on image to enlarge!

The cold hard facts are…

1. The break of the 200-week at $1.3875 two weeks ago is terrible as a “supply/demand” picture. The euro now has risk to $1.31, which was a key breakout level last March. Falling through that puts $1.25 in the cards.
2. A relief rally bounce is likely here as the euro consolidates and FX players await further clarity on the Greek bailout. My strategy would be to sell $1.42 calls on the rally, on a high-probability bet it will not get through that level, and likely not above $1.40.
3. A year ago, the PIGS (Portugal, Ireland, Italy, Greece, and Spain) were an institutional concern, but it never materialized as the Fed liquidity made all carry trades too easy. Now, the Eurozone is being evaluated for its fundamental viability, a concern we haven’t heard mentioned since its debut 10 years ago.

To read more from Kevin, please visit his page on ONN.TV