The
PowerShares DB US Dollar Index Bullish UUP , the U.S. Dollar Index tracking exchange traded funds, and the actively managed
WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU are up 3.2 percent and 4.7 percent, respectively, year-to-date.
Those gains have been fueled in large part by market participants
baking into the dollar an interest rate hike by the Federal Reserve,
something the central bank eschewed at the conclusion of its September
meeting Thursday.
Post-Meeting Reactions
The immediate reaction was forgettable for the greenback and ETFs
such as UUP and USDU. However, on Friday the dollar ETFs are trading
higher, led by a gain of half a percent at this writing for UUP.
What that says is that the door is still open to a rate hike
sometime this year, either at the Fed's October or December meetings.
More good news for UUP and USDU: Expectations for a 2015 rate hike were
not significantly damaged by the Fed's decision Thursday to pass on such
action this month.
“The fact is that the interest rate market’s implied probability for
a rate hike in 2015 did not shift greatly. What has occurred was the
removal of the embedded risk premium for a hike at yesterday’s Fed
meeting, and a small reduction from the October meeting due to a number
of professionals expecting the Fed to make some sort of pre-commitment
to a hike at that meeting,” said Rareview Macro founder Neil Azous
in a note out Friday.
What Expectations Remain?
With 2015 rate hike expectations barely lower Friday than they were
Thursday, perhaps that is a sign investors were too hasty in departing
the greenback. For example, UUP has bled almost $362 million in assets
over the past 90 days,
according to issuer data. Only one PowerShares ETF has lost more money over that period.
Since the start of the current quarter, USDU has lost a more modest
$16.2 million. Still, that number is confounding when considering all
the negative headlines regarding emerging markets currencies investors
have been treated. USDU, by way of being actively managed, can short
emerging currencies. For example, over 11 percent of the ETF's weight is
short the sagging Mexican peso and Brazilian real.
Near-Term Catalysts
In the simplest of terms, the most important near-term upside
catalyst for UUP and USDU is market participants reconfiguring
expectations that a rate hike is going to happen this year.
“As a result, the decline in the US dollar is mostly a function of the
decision not to hike at the September meeting, and a marginal decline in
the probability of a move at the October meeting. The key risk in the
near-term remaining for US dollar longs is that the market removes the
implied probability – or risk premium –of an interest rate hike in 2015.
"At this point there has not been a major shift to that view as the
unconditional probability of a move in December was effectively
unchanged after yesterday’s meeting,” added Azous.
