NEW YORK (
) -- The dollar as measured by the U.S. Dollar Index has put together an impressive rally over the last few sessions. The appetite for risk has shrunk over the last week after three failed attempts by the
to break out above 1100.
Earnings have already been priced into the market, and I don't see a catalyst now to drive equities and commodities higher. Risk appetite should continue to wane. Because of this, I see a continued rally in the greenback even in light of all of the negativity that has surrounded it over the past several months.
While I am a long-term dollar bear, this risk aversion we are seeing again will present some very good trading opportunities within the commodity sector. As long as we are seeing dollar strength, commodities and equities will see weakness. Here is how I am looking to capitalize on the situation:
Long Treasury positions: Regardless of what many analysts say, I think the
will have no choice but to hold rates at exceptionally low levels for the foreseeable future. This, along with investors' desire for less risk, bodes quite well for Treasuries. Look for yields to go lower and prices to go higher.
Short Commodities: Short positions in base metals such as copper and precious metals such as gold can be put on. Copper especially has put together a very impressive rally this year but is looking quite vulnerable at the $3 level. Without any further drivers, look for prices to correct in the coming weeks. I have been bearish on gold for some time as seen in my previous commentary. Gold just does not appear to have much buying interest at these levels.
If investors are afraid to buy an asset on strength, as is the case with gold, it is usually only a matter of time before prices collapse. A dollar rally could certainly put the stake through gold's heart.
Short Higher-Yielding Currencies: The Canadian dollar is one of my favorites to trade. If we are seeing renewed interest in the "perceived safety" of dollars, then other currencies will suffer. Because I expect commodities to decline, the Canadian Dollar is a prime candidate for short positions. More than half of Canada's GDP is derived from commodity exports. Lower commodities equals a lower loonie.
Short positions can be put on through the sale of futures contracts, or with limited-risk long options strategies depending on a particular investor's risk tolerance and trading capital.
Risk disclosure: past performance is not indicative of future results. The risk of loss in trading futures and options is substantial and such investing is not suitable for all investors. An investor could lose more than the initial investment.
-- Written by Matt Zeman in Chicago