A Cheap Way To Play And Profit From The Dollar's Ascent

| About: PowerShares DB (UUP)
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Summary

The bull market in the dollar.

The fundamentals favor higher.

Technicals point north.

The stars are lining up.

Get long the dollar for more than a year for cheap!

The US dollar is on a tear. The greenback is up 12.77% since May 8, 2014 - this is an incredible move for a currency. On Friday, December 5, the dollar index closed at 89.36, moving through the first level of resistance - the June 2010 highs of 88.80. The next resistance lies at 89.71, the March 2009 highs. Above there, key resistance is at 92.53 - the all-important November 2005 highs. It has been quite a move for the dollar but perhaps recent strength is just the beginning.

The bull market in the dollar

Over the past seven months, a bullish trend in the dollar has emerged. The recent attack on some important resistance levels is testament to the currency's resiliency. There are some important things going on in the dollar these days, which I suspect will launch the greenback to new highs in the weeks and months ahead. Since May 8, the euro/dollar exchange rate has moved from $1.3980 to $1.2286 on Friday December 5 - a decrease of 12.11%. The British pound has moved from $1.7165 against the dollar on July 15 to $1.5579 last Friday - a decrease of 9.24%. The list goes on; the dollar has strengthened against every currency out there.

Fundamentals favor higher

Economic conditions in Europe have clearly contributed to dollar strength - on a relative basis the dollar's strength is, at least in part, a result of euro weakness. Meanwhile, economic conditions in the US have improved. Last week's jobs report showed that the US created the most jobs in almost three years. At the same time, many analysts believe that it is just a matter of time before interest rates rise in the US. This has helped to increase the value of the dollar. The prospect for higher US rates is a very bullish fundamental factor for the greenback. Sovereign debt in Europe is trading at artificially low levels in an attempt by European governments and the ECB to stimulate the economy. Even at current rate differentials, US rates are higher than European rates. A widening of the current differential will cause more money to flow into the dollar. The potential for a continuation of low interest rates in Europe seems certain. The European economies are suffering not only from structural issues within their borders but also from sanctions placed on a traditionally important trading partner, Russia. Therefore, fundamentals favor continued strength in the US currency.

Technicals pointing north

The technical structure of the US currency is strong like a bull. The monthly chart of the dollar index illustrates just how strong the current trend is.

Aside from breaking the first of three levels of key resistance, other technical indicators are flashing strength in the greenback. As the dollar has moved higher, so has volume and open interest in the dollar index futures contract. While the dollar is a touch overbought on daily charts, momentum indicators remain bullish. Finally, daily historical volatility at 8.32% indicates that the rally, although impressive, has been slow and steady. Technically, a bullish trend in the dollar is firmly in place.

The stars are lining up

It is indeed rare when fundamental and technical factors combine in any market. Technical strength with a strong fundamental backbone describes the status of the US currency. For the dollar, the rally that commenced in May 2014 looks set to continue. It is quite possible that we are only in early stages of a move that will propel the greenback to new heights. A break above the November 2005 will cause a technical breakout to the upside. The current condition of the US economy, particularly relative to other economies around the globe, is supportive of a massive multi-year rally. The stars appear to be lining up for the dollar.

Get long the dollar for over a year for cheap...

The PowerShares DB US Dollar Bullish ETF (SYMBOL: UUP) tracks the price and yield performance of the Deutsche Bank US Dollar Futures Index. The index is composed solely of long futures contracts. The futures contract replicates the performance of being long the US dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish kroner and Swiss franc. The 52-week range in UUP has been $21.14-23.75. UUP closed Friday at $23.71. The ETF has a net asset value of $919.81 million and an expense ratio of 0.82%. Average daily volume is over 1.8 million shares. UUP is a liquid ETF product.

The January 15, 2016 $23 call option on UUP closed on Friday at a price of $1.20 ($120 per contract). This option is currently 71 cents in the money; therefore, it has 49 cents of time value. The option has an implied volatility of 8.2%, which makes it cheap when compared to current daily historical volatility in the dollar index of 8.32%. There are currently over 6,800 contracts of open interest in this option, making it a liquid vehicle. This option has more than 13 months to go until it expires.

I believe that the dollar is at the beginning of a huge move that will take out all resistance points on long-term charts. Fundamentals and technical factors point to a continuation of the seven-month rally. The January 2016 $23 call option on UUP is already in the money - cheap on a volatility basis and has more than one year to go before it expires. This option offers a great way to play and profit from a market where all indicators are pointing higher.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.