Is the Bottom Nearing for the U.S. Dollar?
The latest data on weekly unemployment claims and gross domestic product has pushed both the stock market and the U.S. dollar down, but I have a slight inclination to believe the dollar will see a rebound before year-end. A Federal Reserve policy meeting is coming up next week, and the market could be volatile. A straddle in the Dollar Index Futures would be a good strategy to play dollar volatility in either direction, or consider a call spread if you are bullish.
A straddle involves buying a call and put at same month and strike price. What you are looking for is increased volatility—you don’t have to pick a direction. If the Dollar Index Futures, traded at the ICE Futures Exchange, gets down to 72, that’s what I’d look at in terms of setting up a straddle.
As I am inclined to think the dollar will find support and recover, I would also consider call spreads in December Dollar Index Futures. There are 127 days to expiration, with a couple FOMC meetings before then, as well as key economic reports. Without going into specific detail, I would consider looking at perhaps a 74/76 or 75/77 call spread. Look for a relatively inexpensive type of trade that offers a decent 3-to-1 or 4-to-one risk-to-reward ratio.
Commodities have seen a big run this year, and have tended to trade inversely to the dollar. Many investors who are long commodities may be shifting out, and this type of strategy would act as a hedge.
If the Federal Reserve starts talking more aggressively about the possibility of rate hikes, that will help the dollar gain some ground. The next policy meeting is coming up on August 5, and while market participants do not expect a rate hike this month, the Fed may give some clues as to when they might pull the trigger.
We’ve seen our share of economic troubles here in the U.S., but there is also a major slowdown in Europe, spreading to Asia. We are seeing weaker housing numbers in many regions. British consumer confidence declined this month to a record low and housing prices fell the most in almost two decades. Central banks may need more to ease more than to tighten, which they have been reluctant to do, given rising inflation.
There has been chatter in many countries with higher interest rates than ours that cuts might be needed given a growth slowdown. That type of speculation has caused the Aussie dollar to pull back. The Australian dollar fell to a six-week low after retail sales in the nation were reported to have dropped the most in six years. New Zealand’s currency hit a 10-month low, and the Canadian dollar has slipped back amid a fourth decline in gross domestic product in six months.
Foreign investors may consider selling their own currency and rotating into the U.S. dollar, if they start easing rates overseas, while the Fed starts preparing to raise our rates here. The U.S. economy has been pretty beaten up, and the question is how much worse it will get here. Maybe it’s starting to bottom.
Feel free to call me with any questions you have about this strategy or others to suit your particular account size and risk tolerance. Ask about our special half-off commissions offer for new clients.
Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.
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