The Dollar's Demise Continues
Today's Idea
With the trend for the U.S. Dollar index firmly in the bear camp, it would seem logical that traders may continue to explore trading strategies that would benefit from a continued decline. However with the potential of a sharp counter-trend rally occurring, especially with the large speculative short position seen, some traders may wish to protect their short position should a reversal occur. One such strategy could be a call ratio backspread. A ratio backspread involves selling one option strike and buying a multiple of another option strike. For example, with the June Dollar index trading at 74.155 as of this writing, one could sell the May Dollar Index 74 calls and buy 2 of the May Dollar Index 76 calls for a credit of about 0.35 or $350 per spread, not including commissions. In this instance, the trader would wish to see the June Dollar index price remain steady, decline or make a large move upward by option expiration about 2 weeks away.
Fundamentals
The U.S. Dollar continues in its doldrums, with the Dollar Index futures falling to lows not seen since the summer of 2008, as traders and investors are moving funds into alternative investments. The downtrend seemed to accelerate after Standard and Poors (S&P) lowered its ratings outlook for the U.S. to "negative" from "stable", citing concerns that the U.S. government will not come up with a viable plan to lower the budget deficit before 2013. In addition, some traders have been moving away from Dollars and into alternatives such as Gold and higher yielding "commodity "currencies such as the Australian and Canadian Dollars. Even the Euro has been gaining on the greenback, despite the continued uncertainty surrounding the debt of E.U. members Greece, Portugal, and Ireland. With the general consensus favoring a continued decline in the Dollar, has the market become oversold? A look at the weekly Commitment of Traders report shows speculators continuing to add to their net-short positions in the Dollar vs. a basket of major currencies; however, the net-short positions are still below record levels. Though it appears that the Dollar still has some room to move even lower, the large percentage of traders already short the Dollar could trigger a major short-covering rally should some catalyst occur, such as an announcement of a restructuring of Greek debt or a major spread of political unrest in the Middle East. So while the "trend is still your friend", it is a rather fickle friend that can turn on you quickly!
Looking at the daily chart for the June Dollar Index, we notice the market has been moving downward for nearly all of 2011. Prices are now moving even further away from the 20-day moving average, trading just above the 74.000 area. The 14-day RSI is holding just above oversold territory, with a current reading of 30.614. The next support level is seen around the 73.500 area, with resistance found at the recent high of 76.055 made on April 18th.
Mike Zarembski, Senior Commodity Analyst
