The dollar is continuing its weak performance, reaching a 13-month low on Tuesday. However, there are profit opportunities that arise when the dollar is in a weak position, as trader Matt Zeman explains. See the following article from The Street, to learn more.
Matt Zeman is a principal with LaSalle Futures Group and chief market strategist for Time Means Money.Com.
The greenback continues to fight for its life. After a brief short-covering rally, the dollar index resumed its downward slide Tuesday, at one point trading at 13-month lows. The dollar certainly has a number of negative factors influencing the slippery slope it is on now. After all, the mighty greenback has become the world’s funding currency.
Furthermore, barring any surprise hawkish comments in today’s Fed statement, interest rates are likely to remain at exceptionally low levels for the foreseeable future. As a matter of fact, futures contracts here at the Chicago Board of Trade show a 41% chance the Fed will keep rates unchanged through March. That’s up from 27% just a month ago.
Also, as if these factors are not enough, the Group of 20 nations will be meeting Thursday and Friday in Pittsburgh. Even though expectations for these meetings are generally quite low, people will be listening closely for any discussion of the dollar’s role as the global currency.
So the question is, what type of profit opportunities does the weak dollar bring?
Although there are many, today I would like to focus on one in particular. That is the dollar vs. the Canadian dollar, or loonie.
Although the loonie put together its biggest advance vs. the greenback in more than two weeks yesterday, it remains vulnerable. Bank of Canada Deputy Governor David Longworth has expressed concerns over the strength of the country’s currency.
Obviously, as the loonie strengthens, Canadian exports become less competitive, and thus the economic recovery is put in jeopardy. The Bank of Canada kept its interest rate at a record low of .25% on Sept. 10. Policy makers reiterated their intention of keeping rates at ultra-low levels, barring any changes in the outlook for inflationary pressures.
Looking at a chart of the December Canadian dollar futures contract, one can see resistance and repeated failures around the 9400 level. This trade has worked well in recent weeks, and I believe it will continue to work. Here’s why: Heavy resistance at the 9400 chart point.
Commodities. Although commodities have been on a huge run to the upside, some of them remain subdued. Crude oil is a good example. This contract has not been able to clear upside resistance around the 73/74 level thus far. One must only look at an intraday chart of crude and the loonie to see the tight correlation between the two contracts. Range-bound crude equals range-bound loonie.
A possible dollar rally. Yes, I did just say a rally in the dollar. If for no other reason that the dollar bearishness has hit an extreme, I feel a rally is most likely in the cards.
I will be watching the 76 level on the U.S. Dollar index closely. This level needs to hold. If the dollar does sustain some upside or at least stop the hemorrhaging, this will bode well for these types of trades.
The trade I am looking at is simple. I will continue to look to get “short deltas” via short call-spread positions. On any rallies by the loonie into this resistance zone around 9400, I will be looking to sell front-month options.
In this case, I am fairly comfortable selling a close to the money strike. For example, the 95/100 call spread. I will be looking to collect a minimum of $700 per spread. The max risk on this trade is $5,000 minus what we collect in premium.
Currently the front month options contract is October and it expires on Oct. 9. This means that an option seller’s best friend-theta, otherwise known as time decay, will be quite rapid at this point.
Should my analysis be incorrect and the loonie does in fact rally above resistance, I will exit the position if it reaches the short strike at 9500.
Good luck in your trading, and remember to trade with your head, not your heart!
Risk disclosure: Past performance is not indicative of future results. the risk of loss in trading futures and options is substantial and such investing is not suitable for all investors. an investor could lose more than the initial investment.
This article has been republished from The Street. You can also view this article at The Street, an investment news and analysis site.