We think financial markets are beginning to have second thoughts about the Fed…a month ago “everybody knew” that the Fed was going to start raising interest rates in 2015…but now we see signs that “some people” aren’t so sure…if these second thoughts become more wide spread then the US Dollar will take a hit…and other markets will react to that.
At the beginning of 2014 “everybody” was forecasting that interest rates would rise…they didn’t…and Treasuries out-performed stocks by a mile. At the beginning of 2015 “everybody” is forecasting that the US Dollar will keep rising. One of the KEY components of the USD bullish forecasts is “divergent” central bank policies…the Fed is expected to tighten while other central banks either sit on their hands or ease.
But since mid-December US credit markets have been “backing away” from their conviction that the Fed will tighten in 2015. Economic weakness outside the USA, falling commodity prices, a strong US Dollar and falling domestic wage growth may cause the Fed to reconsider.
The December 2015 Eurodollar: has rallied ~20 basis points since mid-December…meaning that…come December 2015…the market is expecting 90 day Eurodollar rates to be ~20 basis points lower than what was expected 3 weeks ago. (The Eurodollar contract trades at a discount to par…rising prices signify lower interest rates)
The Euro Currency: We think that the sell-off in the Euro is over-done…it has fallen for 7 consecutive months… it’s at 9 year lows…virtually all currency analysts are lowering their year-end forecasts to Par or worse…bad news for the Euro is everywhere and speculators hold record sized short positions…we are in a “Buy the Rumor / Sell the News” mood. If there is a correction in the USD and the Euro starts to rally then short-covering could easily drive prices to the 125 level. We remain long-term bearish the Euro but we sense a short-term bounce may be at hand.
We took an initial position betting on a USD correction last week…we bought OTM Euro calls…our thinking was that IF the USD is going to correct then the Euro would likely have the steepest rally of all the currencies. If we see signs that the Euro is turning higher we will get more aggressive. If the Euro doesn’t rally we will limit our losses to ~50% of the option premium.
The Canadian Dollar: closed last week at 5 ½ year lows. The more Crude Oil falls the more intense the pressure on CAD…we have added to our long-term hedges on CAD the past couple of months…it’s been hard to sell more CAD at 5 year lows but we felt under-hedged being short only ~30% of our net worth. If the USD corrects lower then we expect all currencies will rally…but CAD probably less than others…unless there is a BIG bounce in Crude. We have no short-term trading position in CAD…but would probably look to get short if it rallies on any USD weakness.
WTI Crude Oil: traded to a new 5 ½ year low last week…closing lower for 14 of the last 15 weeks as it fell from ~$95 to ~$47. Crude seems to be extremely over-sold and it might rally if…the USD shows signs of correcting. We have no current position…BUT…
WTI Crude Oil option volatility: has more than tripled from multi-year lows made in July. We have no current position in Crude…but…we would certainly consider writing OTM puts if we thought that the breathless decline was going to pause…or reverse.
Gold: we bought gold in early December…we were impressed with the $80 rally off the lows on December 1…and we added to our position last week. We like the way gold has traded even as Crude has tumbled and the USD has soared. We note that gold stocks have out-performed gold. We see serious chart resistance at ~$1250…a rally through that level would be impressive. Given that we expect a USD correction we like our long gold position and would look to add on a rally through $1250.
The S+P 500: traded to All Time Highs after Christmas…then sold off into January 6. For our short-term trading accounts…trading on nothing more than market action…we bought OTM calls last Wednesday and loved the big Thursday rally ahead of the Friday UE report. We sold the calls early Friday morning and late in the day we took a new position shorting OTM puts. We obviously think the market is going higher but would abandon our short puts if Thursday’s lows were convincingly broken.
