Depending on your world view, the U.S. dollar has either been range bound in the last year, with the U.S. dollar index trading between $100 on the upside and $92.50 on the downside, with the 200 day moving average right where the Index is trading today at $96.60, almost exactly at the midpoint of the 12 month range:
While the post Brexit vote panic has abated in most risk assets, I think it is important to note that the British pound at £1.31, down from its June 23rd pre Brexit vote high of £1.50, and only up a few pence from its 31 year lows made on July 6th.
Oh and the Euro has spent the last 18 months trading between €1.15 and €1.05, with few reasons to expect a lift given the current uncertainty of the EuroZone’s economy, the ECB’s easing bias and the fact that Brexit likely extends this bias for quarters if not years:
Given the increased economic uncertainty since Brexit, terrorist events like the one in Nice last night should only fuel nationalistic fervor through out EU nations, and I suspect investors will keep the U.S. dollar bid and sell the Euro and Pound on rallies. I’m not sure what it looks like to your eye, but this looks like a bull flag to me, or at least given the geo-political backdrop a run back to the prior highs could be in the offing:
And lastly, the strong June Jobs data, and this morning’s inflation data showing the 4th straight gain in the U.S. could cause expectations for a September rate hike to increase meaningfully (currently Fed Funds futures pricing only a 22% chance), which would cause upward pressure on the U.S. dollar.
If you believe all of the above could occur in the coming months, and that the U.S. Dollar will at least remain bid, and could quite possibly move back towards the 52 week highs, then you might want to consider a defined risk bullish trade in the UUP, the Powershares Dollar etp. If I were to express a near term bullish view, I would target a run up into the FOMC’s Sept meeting, a month or so after the expected easing by the BOE. The UUP is a good vehicle because nearly 70% of its weight is the Euro and the Pound.
So what’s the trade?
Trade: UUP $25, Buy Sept 25/26 call spread for 25 cents
-Buy 1 Sept 25 call for 32 cents
-Sell 1 Sept 26 call at .07
Break-even on Sept expiration:
Gains: of up to 75 cents between 25.25 and 26, max gain above.
Losses: up to 25 cents between 25 and 25.25 with max loss below
Rationale: risk 1% to make 3% if UUP makes move back to 52 week highs. $25 appears to be an important technical level, with an air-pocket back it its 52 week highs very near $26: