Dollar Blues
Fundamentals
The Dollar Index is lower this morning, ahead of the FOMC policy statement. The central bank is not expected to fiddle with its current interest policy, and is widely expected to give forward guidance suggesting that they will continue to keep interest rates low for the foreseeable future. Dollar bears are looking for a statement that does not give any indication of when the low interest environment will come to an end. The greenback may get a boost if the FOMC at least sets a timetable for the conclusion of its aggressive expansionary policies, although this is highly unlikely because it could paint the Fed into a corner and take away its flexibility in the future. The Dollar Index has found some relative stability over the past two weeks on the pullback in equities and commodities. It looks as though the strong GDP data has not given traders enough incentive to boost their Dollar holdings. At this point, the greenback must continue to look to equity prices to find direction, as both the greenback and treasury market continue to trade inversely to stock prices. The only other scenario in which the Dollar could stand to benefit is if the ECB and BOE soften their tone and suggest that they will keep interest rates low for the foreseeable future as well, but this may be a long shot.
Trading Ideas
The Dollar does not figure to get much support from today's FOMC statement. The overall fundamental picture is still weak, but may be improving. The equity markets have shown some chinks in their armor, and a correction in equities may be just what the Dollar Index needs at the moment. However, the stock market has shown plenty of resilience for the past seven months, so there is no guarantee that the market will be in a corrective mode. Technically, the outlook for the Dollar is just as unclear as the fundamental picture. For this reason, some traders may wish to consider taking on a neutral strategy, like a long straddle. An example of such a trade would be purchasing the December Dollar Index 77 call (DXZ977C) and the December 77 put (DXZ977P) for a debit of 2.00, or $2,000. The spread risks the initial investment and the breakeven points would be 79.00 on the upside and 75.00 on the downside.
Technicals
Turning to the chart, the December Dollar Index seems to be trying to find a bottom. After coming down to test the key psychological support level at 75.00, the index has bounced. The December contract has closed above the 20-day moving average for the past four sessions, indicating that a near-term bottom may be in place. At the same time, the market has struggled when approaching the 50-day moving average, signaling a lack of trader confidence from the bull camp. A close above the average and a subsequent close above resistance at 77.50 could result in a longer correction to the downtrend. Failure to close above these levels could result in frustrated longs selling out of positions.
Rob Kurzatkowski, Senior Commodity Analyst
