Trade Update May 31, 2013: My FXC June 97 puts have more than doubled since I initiated this trade 2 weeks ago. The downtrend has stalled a bit this week, and though I think it is likely to continue (U.S. dollar higher, Canadian dollar lower), I now own a 3 week option that is prone to decay, so I am going to take my nice gain here. I still like the long dollar theme, and I currently have a FXE position along those lines.
Action: Sold to Close FXC ($96.07) the June 97 Put at $1.30 for a $0.70 Gain
Original Trade May 16, 2013:
I posted my long-form thoughts on the dollar in my macro wrap yesterday. I cited 3 key reasons why I expected dollar strength:
- Rates Have Converged to 0. Would you rather earn 3-4% with your money in Malaysia, the Philippines, or Thailand, or 2% with your money in the U.S.? Would you rather earn 1.6% with your money in the Eurozone, or 2% in the U.S.? Would you rather earn 1% with your money in Japan, or 2% in the U.S.?All of a sudden, the U.S. dollar is not looking too shabby.
- The Federal Reserve’s next step is more likely to be taking the foot off the gas rather than pushing further down on the pedal. But most importantly, the U.S. dollar has been able to rally this year even with the Fed in full QE mode. In my mind, any hints at reducing QE by the Fed would just add rocket boosters to a trend that is already in force
- Outperformance of U.S. assets. In the past couple years, we have seen the pendulum swing back towards the developed world, as emerging market stocks and commodities have underperformed as investments. That has significantly reduced the appeal of emerging market assets, and is leading to a shift back into growth investments in the U.S. (which is still the envy of the developed world in terms of financial market depth and performance).
In that context, the Canadian dollar has actually held up quite well relative to other developed market currencies this year, primarily because of its ties to the stronger U.S. economy. However, Canada is still quite exposed to the energy and mining sectors, and it also has a potential housing slowdown on its hands to boot.
On a technical basis, the USD/CAD cross has been much ado about nothing for 3 years now. But it has built a very long-term base, and it looks like it might be on the cusp of an important breakout. Here is the 5 year weekly chart:
It has formed a wedge over the past 2 years, with lower highs and higher lows. But it is trading above its 200 week moving average (black line) for the first time in that period. The break lower in the Aussie dollar this week could portend an imminent break lower in the Canadian dollar as well (which would mean a break up in the USD/CAD cross above). Both are commodity currencies that have enjoyed safe haven status for several years now, but with overheated housing markets and much lower rate differentials than in the past.
So what’s the structure?
TRADE: FXC ($97.87) Bought the June 97 Put For $0.60
-Bought 1 June 97 Put For $0.60
Break evens on June Expiration:
-Losses of up to 0.60 between 96.40 and 97, max loss of 0.60 at 97 or above
-Profits below 96.40.
Trade Rationale: The FXC is the Canadian dollar ETF. It will rise and fall with the Canadian dollar. If the USD/CAD rate breaks above the 1.035 level, which corresponds to the 96 support level on FXC, I think FXC will be off to the races. Since volatility is quite cheap (only an implied vol of 7.5), I like buying an out-of-the-money option on an outright basis.