The US dollar (USD) is in a bit of a downward spiral in recent trade as it closed lower yesterday for the thirteenth time in the last seventeen trading days. More than 6% off its highs of mid-March, USD has fallen at the hands of a few different characters that mainly include the Australian dollar (AUD), pound (GBP), and euro (EUR).
Foreign exchange (FX) markets are nuanced in a way that necessitates movement in one currency come at the expense of opposing movement in one or more other currencies. This can cause confusion in the seemingly simple process of buying or selling US dollars. For example, the Australian dollar has rallied more than 20% against USD since mid-March, while the Japanese yen (JPY) has moved higher by less than 5% against that same USD in the same period.
Traders looking to these traditional FX products for their US dollar exposure have to both invert their assumption, meaning they must sell one of these examples to buy USD, and choose between several paths. Selling the Australian dollar looks like the best value for a long dollar play at the moment, but knowing that it was the weakest of the group to start the year might sway opinions. The Japanese yen looks like the calmest way to trade dollars, but, if the Bank of Japan returns to its active nature of just a few years ago, the yen can move wildly with no regard for USD’s status.
Trading Diversified USD
Futures products such as the Small US Dollar (/SFX) contract let traders act on their USD opinions in a straightforward manner that’s diversified against the group of five currencies above with the addition of the Chinese renminbi (CNY) and Mexican peso (MXN). The intricacies of foreign exchange can be condensed to a single price that moves higher and lower with sentiment in the US dollar.
Adding Some Micro Flavor
After taking a long or short position on the broad USD market, traders can add an extra layer of creativity and specificity to their FX portfolio by either taking exposure to one of the seven currencies out of the trade or applying an extra emphasis on one of the currencies. /SFX’s small size and simple design makes it easy to expand dollar trades to the world of E-micro foreign exchange futures.
Traders can use these complementary futures products to hedge long dollar exposure, for example, by buying the weaker Japanese yen future (/MJY) to remove its short bias in the /SFX trade while creating a buy-buy pairs trade between two negatively correlated products. Conversely, those looking to attach an extra, more specific long dollar exposure to their Small US Dollar trade can sell the stronger Australian dollar future (/M6A), but keep in mind that this would add risk, not manage it. The current ratio of /SFX to E-micro foreign exchange futures is 1 unit to 1 unit.