Low Risk Currency ETF Trades With 'Blood in the Streets'

Includes: EUO, FXE, FXY, TLT, UUP, YCS
by: The Deliberate Trader

If everyone is “bleating,” determine the direction in which the sheep are heading and then move steadily and confidently in the opposite direction. However, to a finer point, the less confidence you have as you move ahead, the more probable it is that you are headed in the right direction. The best trading opportunities are before us when “there is blood in the streets.” If the bet does not tweak your guts when you make it, it is probably not the right bet.

It is our understanding that world currencies are relative creatures of value; in a vacuum, the objects that constitute “currency” are worthless pieces of paper or coins. These objects are used simply as a medium of exchange, and their value is either determined by decree, or they have “value” relative to the other world currencies whose values are permitted to fluctuate and vary among each other. Like many things, fluctuations in relative value tend to oscillate to extremes over time; eventually, they revert to the mean. Currencies are no different, although they do trend persistently.

These are our plain perceptions of the present general state of world currencies, and some of the trading opportunities that we see on account of them. The U.S. dollar is the world reserve currency. That fact is paramount to our currency trading decisions. The euro may be gone in three to five years, but the dollar will still be here. The problems of virtually every other world currency are worse than those of the dollar, and none of them have world reserve status.

Debate it however you will, its status is elevated over that of any currency that is actively traded. That will not change anytime soon. In a relative sense, the U.S. economy will continue to lead the way on the global economic stage. The last bastion of stability will either persist in America, or stability itself will not survive. Buy gold for that contingency, but take no comfort in the prospects for having to use it as a medium of exchange.

In America, when we go to the grocery store to purchase milk, eggs and bread we are not paying with gold, silver or anything but greenbacks. That will not change anytime soon. Comments to the contrary are borne out of fear, one of the two emotions that drive markets. We are exploiters of fear.

Meanwhile, the relative value of the greenback as reflected by the U.S. Dollar Index is low. This relationship clearly has effects, both negative and positive, upon the relationship of the dollar to other currencies, the global economy, trade balances, finance, and the administration of world governments. Since the dollar's value is low, other currency values must be high if values are truly relative.

Although a persistent current theme in the media is the high cost of everything in America, the fact is that of the 30 highest cost cities in the world, none is in America. Fully a dozen are in Europe, and three of the top five most expensive cities in the world are in Japan.

Population centers in Japan and Europe are clamoring for relief from the ill effects of natural disasters, economic hardship and fiscal irresponsibility. What is one way to reduce the economic burden of a region's population without actually giving them financial assistance (which world bankers may facilitate anyway with various loan and aid packages)? How about lowering their cost of living?

Does the Bank of Japan (BOJ) have a reputation for manipulating its currency? While that is fortunately beyond the scope of this article, it is clearly an option that the BOJ has at its disposal.

If the relative value of the yen and euro falls against the dollar, there should be some measure of relief to the burden being experienced in many high cost regions of the world. A lower yen means a lower cost of domestic goods and services to the Japanese people. This is an emerging trend that we anticipate is unfolding for a number of reasons. If the currencies of other economies are about to sag or decline, the world's reserve currency will rally and strengthen. Bank on it.

From an American perspective, virtually no one has anything good to say about the dollar, U.S. central bankers, the politicians that they control, or the fiscal policies of the present (and past) administration(s). Are they going away? Not likely. Will the value of the dollar only go down forever?

Almost nobody speaks favorably of U.S. government debt. Incredibly, many question the very “safety” of U.S. debt, apparently failing to distinguish between the “risk” of an investment and its “return” characteristics over time. Bonds may not provide a commonly acceptable return, but as insiders have been selling the equity in their own companies in the tens of millions of dollars daily in these markets since late last fall, where is it that you think they are putting their mountains of excess cash?

Getting to the Point

Attitudes borne of fear shed the “blood in the streets” that we seek. Nobody is going to point it out to us and say, “Look, there it is.” We either see it or we don't. So we have been successfully invested in TLT since February. Other trades not directly correlated to stock market risk that we suggest and/or have positions in include in our order of preference:

  1. Buy UUP September and January at-the-money (ATM) or near-the-money (NTM) calls.

  2. Buy YCS November ATM or NTM calls, or purchase the shares and use a stop below the March bottom (very low risk)/

  3. Buy EUO using a stop below the May low, or purchase its November call options.

Options in these ETF vehicles give us leverage; and presently with option implied volatility reasonably low, call purchases are favorably indicated. Buy low; sell high; control risk; make dollars.

Disclosure: Long UUP and TLT.

Additional disclosure: I may initiate a long position in YCS over the next 72 hours.