Nobody Expects the U.S. Dollar to Do This

Momentum gauges go negative… safe-haven currencies in trouble… election concerns… and a short-term swan trade on the dollar.

With the Dow off 800 points on Monday, people continue to speculate that the Federal Reserve will load up its cannons and fire money into the markets again.

After all, Fed Chair Jerome Powell is speaking three times this week. And that can’t be good. 

At some point, to ease everyone’s worries, they can just keep a camera on him 24 hours a day. We can watch him eat, watch him sleep, watch him fog his glasses and wipe them off. 

Just 24 hours for us to always know that he’s there.

We’ve had small blips in the post-March rally over the last few months, but here’s why things are different this time.

Today, many momentum gauges for the S&P 500 went negative for the first time since late February. 

And if selling pressure picks up, we’re not looking at a selloff…

We’re really looking at a “Race to Cash.”

Conditions on the Ground

There’s a lot going on across the markets right now all impacting what would normally be other currency safe-havens besides the dollar.

The Bank of Japan’s Gov. Haruhiko Kuroda said that the nation’s central bank will continue to pump money into its economy to reduce the impact of recession. So, we’ve got a safe-haven currency that is likely facing new pressure in the Yen.

Europe’s economic recovery also looks very uncertain, at least according to Christina Lagarde, the President of the European Central Bank. Meanwhile, there are reports that the United Kingdom is ready to shut down once again due to COVID. Neither trend fares well for the Euro, and the latter isn’t positive at all for the Pound. 

And the fact of the matter is, that we’re facing a lot of worries about our own recovery and the reemergence of COVID as well. It’s not like this stock market recovery was built on the wings of strong economic outlooks and fundamentals.

It was built on the Federal Reserve’s willingness to drop money out of helicopters and pump numbers into computer screens on behalf of the banks they report to in 2020. 

It doesn’t help that these same banks are now facing charges of laundering $2 trillion over the last 20 years…

Even though the dollar is facing pressure, it’s still the cleanest sheet in the laundry. This is why when we see selling pressure hit the market – we’re seeing the dollar rise alongside increased volatility and negative momentum.

Momentum, Momentum, Momentum

At the end of the day, whether I’m digging into tech stocks with the most upside or looking to time the geopolitical Black swans that are always paddling through the market waters…

Everything at the high level comes down to buying pressure and selling pressure. 

Market wide – whether it’s across the thousands of public stocks – or just the broader S&P 500 – there are a variety of ways to measure which side of the equation is higher than the other. 

Today, for the first time since February, that selling pressure is outweighing buying pressure on the S&P 500. 

And what I’m seeing is that when selling pressure surges, a “Race to Cash” is on.

That is bullish for the U.S. dollar, even if only for a little while. 

Longer-term, however, I expect that the U.S. dollar will get weaker after the election. 

If Trump gets reelected, the dollar could get weak after investors pump cash on the sideline back into equity markets. 

Or, I propose that the market will worry about the combination of tax hikes and increased government spending. That might bring the Fed back in yet again with more stimulus to help offset any selloff fueled by concerns about the economic impact of rolling back the 2017 tax bill. 

All of this is a bit speculative right now, and we still have seven weeks until the election. 

With so much uncertainty right now, we’ll need to confirm the trend of selling pressure. 

But it doesn’t mean that one shouldn’t speculate on a race to cash and a stronger dollar over the next seven weeks before the election. 

A Short-Term Swan Trade on the Dollar

I’m expecting that the U.S. dollar is going to rally if we continue to see stronger, negative momentum. 

It might not be long, but it will be long enough that people could get caught off guard by a quick rally. 

And though it’s typically a rule not to fight against the Fed, the upside for a run here is too good.

This is going to be higher risk because the Fed might jump out and pump more money into the markets. 

This is why I’m so intrigued. No one thinks that the dollar can go higher because of the Fed. The difference from the recent head-fakes is that a selloff in the market is going to provide a potential for cash hoarding ahead of the election.

No one believes that the dollar can go higher. And that is the type of trade opportunity that gives us massive upside. I’m talking about a 10 to 1 winner out of the gate. 

One fund I am looking at is the Invesco DB US Dollar Index Bullish Fund (NYSE: UUP), which tracks “the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona.”

The fund was up nearly 1% on Monday. The last time we saw momentum go negative for the S&P 500 and a race to cash start, the fund jumped from under $26 on March 9 to more than $28 about 10 days later. 

I’m looking at the October 23 $25.50 calls at a limit of up to $0.15. This has an implied vol of 7.5 (which is incredibly low and a signal that no one is looking in this direction). 

You’re either going to lose $15 per contract or see a return north of 900% if the UUP shoots to $27 in the next few weeks. 

That’s the type of bet I’m willing to make when no one else is looking.