There's been a lot of talk about this "King Dollar" phenomenon, mostly centering on whether it's a good thing or a bad thing. I've never been one to bet the bull side of the US dollar, what with America's skyrocketing debt, runaway spending, and open printing press mentality. Still, as an investor in the US, and one not always enamoured of the investment choices out there, I once in awhile end up with a cash-heavy position.
That's been the case in recent months, and to my surprise this strong dollar market broke out right in the middle of my coincidentally having a bunch of cash on hand. Sometimes you just get lucky, but I'm generally bearish on the US dollar, so sitting on a bunch of "strong" dollars makes progressively less sense.
Being in the US, having a dollar denominated account, and being a dollar bear isn't so easy though. Powershares Dollar Bear (UDN) is there, of course, but with its basket-of-currencies approach, I've always thought it a bit too conservative to the upside.
Today, I found exactly what I was looking for. I've known about CurrencyShares forever, of course, and in the past dabbled in them. Today I noticed there is some option trading in them, and it's not the sort of hugely wide gap you'd expect from options in ETFs that are themselves not super heavy traders/movers.
I decided on CurrencyShares Australian Dollar (FXA), January 2016 calls, the farthest out I could go, and 70.00 strike. At the time of trade, FXA was at $78.50, and I got the calls for the extremely reasonable price of $8.76 each, meaning I'm only paying a 26 cent premium to the current price.
Why FXA?
In trying to choose a CurrencyShare to target for this I went over the assorted choices, and tried to pick the currency which by my own metrics seemed "strongest." I looked at a few things, but the really decisive metric for me was public debt as a percentage of GDP.
These are all liberal democracies we're talking about, so we can expect them to deficit spend somewhat. I'm not going to get on a political high-horse about the merits of such a policy, as my only concern is that when the national debt becomes too large and unwieldy, states throughout time have inflated their way out of it, which is bearing for their national currency.
| Australia (FXA) | 29.30% |
| Britain (FXB) | 90.00% |
| Canada (FXC) | 84.10% |
| Germany/France (FXE) | ~85.0% |
| Japan (FXY) | 226.1% |
| Singapore (FXSG) | 111.4% |
| Sweden (FXS) | 38.60% |
| Switzerland (FXF) | 52.40% |
(source CIA World Factbook)
When you use the United States as the neutral position at 72.50%, you quickly find that a lot of these currencies aren't addressing the problem I'm seeking to avoid. FXA is a bit better than FXS by this metric, but it's not the only factor.
Interest rates are also a sign of relative of currency strength, of course, and a lot of the recent US dollar strength has been on speculation of an interest rate hike. Sweden's interest rate is beyond low, and the FXS rate listed on the CurrencyShares site is actually negative. FXA, by contrast, has the highest rate of the bunch by a fair bit, which is another bullish point in its favor.
Conclusion
I'm not presenting FXA options as the end-all, be-all play for dollar bears, but I thought they were a rather novel one and I thought I'd explain my thinking. I'd love if other dollar pessimists like me would comment on what they're doing to avoid a return to form.