The seemingly endless speculation about whether the Fed will raise interest rates is getting old. The Federal Reserve has telegraphed a long-awaited move off “zero” for months now, only to disappoint again and again – cowed by weak economic data or fears of a global slowdown due to a stronger dollar. We believe that by not acting, the Fed is adding to the instability and financial uncertainty it keeps trotting out as excuses to delay an increase.
The strong dollar is behind much if not most of current market doldrums. Stocks and interest rates chop sideways. Commodities continue their slow grind lower. We fear that markets will remain in the doldrums until Janet Yellen and Company get off their collective butts and get on with it already. Failure to do so now could have even more dire consequences down the road. If the Fed continues to cry “Wolf!” enough times without an actual wolf showing up, the markets may begin to ignore the warnings. This could lead to massive and destructive repricing when the wolf finally does come.
We prefer to be optimistic, so we are predicting the Fed will give today’s Grinch-like markets a Christmas present to be thankful for. We say “thankful” because we have a sneaking suspicion that once the Fed finally acts, we could be presented with a number of “big move” opportunities all at once. Since a 25 basis point increase is already baked into prices, we are expecting either a series of “buy the rumor, sell the fact” reversals in key commodities and currencies, or a collection of violent, cathartic moves in the direction of current trends that could extend through the first quarter of 2016.
Which will it be? We don’t know. What we do know is that we are fairly well positioned to capitalize either way with our long wheat, sugar and platinum / gold spread trades poised to benefit from the former and our short euro currency and Eurodollar strategies designed to capitalize on the latter. We are contrarian by nature so we are going to suggest skewing our collective bet a little more toward the reversal camp.
Contrarian Buy in the Australian Dollar
Things have gotten so bearish in the commodity sector – especially in metals and energy – that we are finally ready to take a low cost bullish position in the opposite direction. One way to do this inexpensively — albeit indirectly – is by getting long the Australian dollar. Mining and energy make up a good chunk of the economies of both Canada and Australia which is why the Canadian dollar and the Australian dollar are known as a “commodity currencies.”
We are choosing the Aussie over the “Loonie” for two reasons: 1) Australia is in the perfect position geographically to take advantage of an economic recovery in Asia which is still the fastest-growing region in the world despite the recent slowdown and 2) at 2.00 percent, Australian interest rates are still much higher than Canada’s 1/2 percent and America’s “zero” and will still be much higher even if the Fed decides to move in December.
Australia’s 2.00 percent rate is also much higher than that of Europe, making a long Aussie play a potentially perfect complement to our open short euro positions.
We also like the way the Aussie is setting up chart-wise. Friday’s second consecutively higher close over both the 38-day moving average (blue line in chart above) and well-established downtrend line, has negated much of the bearish energy in this market. Today’s upside follow-through is friendly as well.
Our first target is 76.00 cents in the front futures contract. However, we believe this market has the potential to move as high as 79.50 cents in the first quarter if the “buy the rumor, sell the fact” reversal in the dollar we are expecting pans out. Consequently, we are asking our trading customers to consider buying relatively low cost, bull call spreads in the Australian dollar.
The trade we are looking at right now is going for roughly $600 per unit. This plus transaction costs is the most we can lose. It has the potential to be worth as much as $3,000 should the Aussie split the difference between our two targets and reach 77.00 cents to the dollar on or prior to option expiration on March 4, 2016. If you are interested in this trade, check with your personal RMB Group broker for the latest or contact us at the numbers listed below.
You need a futures account to trade the recommendations updated in this report. If you do not have one, the RMB Group has been helping their clients trade futures and options since 1984. All of our brokers are very familiar with this strategy. Call us toll-free at 800-345-7026 or 312-373-4970 direct to learn more. We’ll send you everything you need to get started.
If you are new to futures and options and want to learn more about them, download the “RMB Short Course in Futures and Options” – our easy-to-read booklet covering all the basics.