Dollar Rising
I think the time to go long the dollar is approaching/here. USDJPY usually falls when the stock market falls, today the market opened a little lower on Freddie Mac news but USDJPY gained from 108 levels to 109 levels. This tells me that there are a lot of shorts out there who will be feeling the pain. Also, the dollar has gained against the Euro...
The market is betting on the European Central Bank and other banks wanting to cut rates in the future and the Fed holding them steady or to raise them...
the last days have seen the dollar rally a lot.
Currency Volatility is Lower which means low priced options
Also front end currency volatilities across the board are low again... EURUSD volatility is nearing 7-9% levels from double digits.
Trades: Long spot with 3- 4% stops won't be a bad idea. An out of the money European Option, if you think that volatility will increase as dollar rallies. The European option strategy will make a positive return since spot will go in the favor of the trade and volatility may increase on surprise announcements of macro figures in Europe/Japan.
Second Strategy: Another strategy could be to just buy spot and then use barrier options as an add on to increase your leverage substantially. The tricky thing with barrier option is that if your barrier is touched even once the option becomes worthless. However, this knockou characteristics is what makes them cheap in the first place! Additionally if your barrier is in the same direction that you make a profit, i.e. imagine you get long USDJPY spot at 109 levels and your barrier option becomes worthless in a month at 115.10 spot level. If the option touches 115.10 you will have made a lot of money from your spot position! If spot stops at 112 then you will still make a lot of money from the barrier and from the spot. If USDJPY falls then you will have lost less money than you would have paid otherwise for a European Option. I am not suggesting that a barrier option is "cheaper" - it is usually fairly priced but that the barrier may be the appropriate option to express your view.
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3 comments:
Hello Apurv!
Hey man
The theory on going long dollar sounds good and I do agree with it to a great extent.
Specifically against the Euro though I think inflation has to be factored in. US is seeing big inflation numbers at the moment. The US govt numbers do not suggest as much but our grocery bills point to much higher levels of inflation. From my perspective I see the inflation trends sustaining for a significant time period (end of 2009). That would lead to higher interest rates at some point of time and bring inflation in check. Of course there are a lot more factors in determining currency movements, but I think this discussion is incomplete without your perspective on inflation and it's affect on the dollar.
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