Over the past month, leading up to this morning’s ECB meeting and the FOMC’s December 16th meeting we have taken a look at the U.S. dollar on a couple of occasions. First vs the Euro (here on Nov 6th) and then the US Dollar Index (DXY vs a basis of 6 currencies, here on Nov 20th). We have agreed with the consensus view that in the face of continued ECB easing and expectations that the US Fed raise interest rates for the first time since June 2006 that the Dollar would continue to appreciate vs the Euro. Combine that with China and Japan continuing their own easy money policies and emerging markets like Brazil and Russia dealing with domestic economic crises from the industrial commodity crash and it’s hard to see the dollar not at least hold its 10% gains of the last year. But we have been cautious in our tone as a lot of this trade has already transpired.
Today the Euro is ripping, at one point up 2.5% vs the Dollar (now up 2%). This is a MASSIVE move for a currency. Market participants were unimpressed with the ECB’s rate decrease and tepid QE commitment. I may not be a macro maven, but I am an experienced trader and today’s move feels like the obvious result of positioning heading into the event. There seemed to be a universal consensus that the Euro would trade back at parity with the dollar and a sell the news reversal was likely. Combine that with some disappointment of the news and you get this big move.
I rarely like to press a consensus trade, and while I share the consensus view that the dollar is going higher in 2016, I already felt the trade to be crowded. In the trade that I detailed on Nov 20th in UUP (the etf that tracks the dollar vs a basket of currencies – Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc) I positioned for this type of consolidation near term and then a breakout in the new year.
Today’s move higher in the Euro, in front of the Fed meeting in two weeks could set up for those who have been patient for a great short entry in the Euro. The bounce off of the lows from Spring this morning at $105 could drive the short covering trade to its 200 day moving average (yellow line below, just above $110):
As for the UUP, a pullback to the converging 200 and 50 day moving averages near $25.35 could also be an attractive entry.
As far as our bullish UUP options trade, we’ll look to cover the short Dec31st 26.5 calls at some point and then look to further spread the long March 26 calls.