Dollar's Recovery is Delayed
I've been cautiously bullish on the U.S. dollar for a few months. I've been trading my view using a very low risk, buy-on-the-dip type of strategy. But I'm shifting my view and getting a little more bearish on the dollar.
The only reason I was cautiously bullish on the dollar was due to the perception that the Fed would raise rates later this year. But that belief is starting to wane.
Up until the beginning of this week, the market believed that the Fed would start hiking rates in a few months. But that's all changed due, in part, to this week's meltdown in the U.S. stock market.
Take a look at the Fed Funds Futures for October. This is a futures contract that tells us the probability of a rate hike by October. The higher the contract goes, the lower the probability of a rate hike. Put another way, the higher this contract goes, the lower the dollar goes.
October Fed Funds Futures
In the last four days, the October Fed Funds Futures have gone from 97.40 to 97.70. That's a big jump of 30 basis points and the reason that the dollar is sagging.
I'll be watching the Fed Funds very closely next week. I might start to short the dollar if the Fed Funds continue higher.
Eric
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