CALL BUYERS CONTINUE TO POUR INTO THE DOLLAR ETF
UUP saw continued buying yesterday by options traders:
UUP – PowerShares DB U.S. Dollar Index Fund – Call options continue to be bought again today in this ETF tracking the performance of the U.S. dollar index. We’re coming around to the view that rather than expecting a bullish perspective on the behavior of the dollar, some savvy options traders paid attention to the filing on Tuesday by the fund’s managers who noted that they may have to create more shares in order to meet growing demand. Heavy option activity followed, which may have created further liquidity issues at the fund and caused a short squeeze on Thursday when shares were halted pending this announcement. What is noteworthy is the fact that the UUP veered off in a direction all of its own, surging two percent at a time when the dollar index was practically unchanged. So we’re not quite sure what the buyers of November and December 23 strike calls are doing on the other side of this trade. It’s possible they have a ready made hedging or arbitrage position to offset as many calls as they can. Open interest in the November calls today grew to 310,000 from 40,000 on Monday, while the 20 cent premium today has seen a further 30,000 contracts change hands. The dollar did get a short-lived boost after the rate of unemployment broke the double-digit barrier earlier in the morning. Non-farm payrolls fell by 190,000 in October lifting unemployment to 10.2% – the highest in 26 years. Dollar buying as a safe haven quickly abated as investors came round to realizing that the economic gloom continues to clear.
Source: IB
“….economic gloom continues to clear”?? Anyone who read the household survey results would not agree.
However, it is precisely the continued worsening in unemployment that supports the risk trade and a weak dollar (carry trade borrowing) because it confirms that Fed will be on hold for a very long time. (The dollar strenghtens in a rapid collapse – fear – and weakens in an slow motion collapse – greed.) The Fed’s mandate is full employment and stable prices. So long as we have a deflationary price environment, the Fed’s primary focus will be on stopping the ongoing decline in employment.
They haven’t yet tried the Swedish experiment of imposing negative interest rates. But highly negative interest rates would appear to be called for. The problem is that with the Treasury’s continued massive borrowing in the face of a credit contraction in the private sector, real interest rates on government bonds are almost guaranteed to rise either via deflation or an increase in the nominal rate. Real price deflation seems unlikely so long as the rest of the world economy remains afloat so nominal rates will need to rise. The Fed can only buy so many Treasuries before they lose complete credibility. But rising rates will be kept in check by a collapsing risk trade. Last week as a taste of how quickly the risk trade can recede (just look at emerging market equities).
A boom-bust balance. US equity prices are pretty close to their 12 year average. The moves up to S&P 500 1,500 and down to 700 are just a bit of minor volatility in otherwise stable prices
Whose writing the calls?
James Reply:
November 9th, 2009 at 1:50 AM
Probably the OCC. I would be very surprised if UUP is above 23 dollars by Nov 20th so they don’t have to pay out anything…
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