Why I?m Covering Some Euro Shorts

We have snatched 92% of the potential profit in the Currency Shares Euro Trust (FXE) September, 2014 $133-$135 in-the-money bear put spread, riding the Euro (FXE) down on the short side, from $1.33 down to $1.30.

The risk/reward of continuing with such a large position is no longer justified.

So I am going to reduce my overweight position down from 20% back to a more normal 10%. If you are similarly overweight the ProShares Ultra Short Euro ETF (EUO), I would also be lightening up, retuning to a normal weighting there as well.

I have not suddenly fallen in love with the beleaguered continental currency. I think we are headed towards $1.27, $1.20, and eventually $1.00. This is just a short-term tactical move.

That way, if by some miracle, we get a two-cent rally in the Euro, I will have plenty of dry powder to reload with and add more shorts.

The big event of the weekend was European Central Bank President, Mario Draghi, ramping up his war on his own currency.

On Friday evening, after the markets closed and traders were long gone for the Hamptons, Bal Harbor, or Napa Valley (oops), Draghi ramped up his rhetoric, warning that he would use ?all available tools? to spur Europe?s economy. This is central banker talk for throwing down the gauntlet at the feet of the monetary hawks (read Germans).

He then threw the fat on the fire, opining that the recent decline an inflation expectations were a concern, and this was a topic for the coming September 4 ECB meeting. Translation: this is a central banker?s equivalent to giving the hawks the middle finger salute, and then putting the pedal to the metal on the easing front.

The bottom line for all of this is that the ECB is almost certain to cut Euro interest rates next week. As interest rates differentials are the primary driver of foreign exchange markets, this is great news for the greenback and terrible news for the Euro.

After that, we may get a small rally in the Euro, as short sellers, like me, take profits. This has been the pattern with other Euro interest rates reductions in the past. That is the rally I want to resell into.

You can expect this pattern to continue until Europe solves its structural monetary problems, which will take years. The current flawed system dramatically undervalues Germany?s currency, while overvaluing the currencies of Italy, Spain, Portugal, and Greece.

This is why the German economy is healthy, while everyone else?s economies suck. Without the Euro, the old deutschmark would be double or triple what it was, demolishing the country?s massive export business. In the meantime, the other countries would be devaluing their own currencies like crazy.

We caught the entire reaction to Draghi?s verbiage at this morning?s opening, with the Euro gapping down a full half-cent against the dollar. The stop loss selling was severe.

I wish all my trades were this easy. Since I doubled up on the short side, the Euro has been in a complete free fall. European dithering has been one of the lowest risk bets of 2014.

That said, I think I?ll get back to cleaning up my earthquake damage.

FXE 8-25-14

EUO 8-25-14

Falling 100 Bills-Euros