Everyone knows what this is. It is a $1 bill. This one dollar bill has $1 of purchasing power in the United States but has vastly different purchasing power all over the world. The US Dollar is the currency that the rest of the world pegs their own currency against as it is seen at the benchmark currency. There are a few reasons for this, namely the economic prosperity of the United States as well as the Petrodollar System (oil coming in and our of OPEC countries can ONLY be transacted in US Dollars). With this in mind, the US Dollar is a commodity. And if it’s a commodity, it is tradable. Let’s see what our options are for having exposure to the US Dollar.
The US Dollar
As we mentioned before, the US Dollar is a commodity thus we can trade it. The US Dollar futures contract is the most popular way to have exposure to the US Dollar and its fluctuations in price. Like all futures, /DX US Dollar futures can be traded by anyone with futures permission and trades like other futures contracts during the Globex hours.
There is something very interest about these UD Dollar futures. They are priced based on other currencies! Let that sink in. The US Dollar futures are not priced on US Dollars (reminds me of the $VIX). They are priced off the following basket of weighted currencies. The reason why? Because those currencies represent the majority of international trade that goes on between the United States and the rest of the world. Here is the makeup:
- Euro (/6E): 57.6%
- Japanese Yen (/6J): 13.6%
- British Pound (/6B): 11.9%
- Canadain Dollar (/6A): 9.1%
- Swedish Krona (/SEK): 4.2%
- Swiss Franc (/S6): 3.6%
Unfortunately, having exposure to the US Dollar through the /DX futures contract might be a little pricey and risky for some. Let me explain.
One US Dollar futures contract is equivalent to 1000 times the index or $101,340 per contract. That’s pretty large. Each tick size (smallest distance between two prices .005) is worth $5. Right now with the current daily expected move in the US Dollar futures, one can expect to make or lose somewhere within plus or minus $4,320 a day. That is steep and unless you have well over a 6 figure account we do not recommend trading US Dollar Futures.
But what if we still want exposure to the US Dollar and we do not have an account large enough where it is reasonable to trade the US Dollar futures? Maybe there is a dollar ETF we can use?
$UUP…The Most Popular Dollar ETF
Like in our other posts about ETF’s for futures products, we must go through our checklist to see if $UUP (Powershares US Dollar Index Fund) is worth our money. Let’s go through our two-point checklist to see if $UUP is the true dollar ETF.
The first step to seeing if the dollar ETF $UUP is a worthy and less expensive way to get exposure to the US Dollar is by seeing if $UUP and /DX trade with one another. We check their price movements to see if we will have a correlated position in the dollar ETF.
The above chart shows the price comparison of US Dollar futures (reg/green line) compared to the dollar ETF $UUP (pink line). Any level of correlation over 75 (100 is max) means that the two underlyings we are comparing are highly correlated thus have the same exposure. On the other hand, any level of correlation under -75 (-100 is min) means the two would be highly negatively correlated. /DX and $UUP come out with a 92% correlation thus incredibly correlated. $UUP would give us the same exposure as holding US Dollar futures.
Again, correlation is very important as it is one of our only two factors here. The correlation between /DX and $UUP is very high so correlation checks out. However, liquidity is the gatekeeper as we need to be able to get in and out of our positions quickly as well as hedge and improve our positioning through options.
We do not have accurate bid and ask data right now because we are writing this post on a weekend and the bid and the ask after hours are extra wide no matter how liquid the product is. However, by looking at the stock volume we can see if the bid and the ask will be reasonable. Any stock volume over a few million shares will let us know the bid and the ask are not very far apart.
Cha-ching. Almost three million shares pass our stock liquidity test. With this many shares traded we know there is interest from institutions and thus making $UUP a liquid product to trade stock. How big of a product is the dollar ETF $UUP really? Well with 2.9 million shares traded, the total notional value that exchanged hands was $76,754,856.61. Not bad.
But what about options volume? While stock volume is great, we never recommend outright buying or selling stock. We need to be able to trade options around our positions.
I have seen worse…that’s for sure. 5,339 is actually passable here. Man, looks like everyone thinks the dollar ETF $UUP is going to rise. While 5,339 is a decent amount of options volume, the total notional value of the options traded Friday in $UUP is $13,972,163, which allows the options markets to be 1-3 pennies wide.
$UUP absolutely passes our test as a viable and cheaper option when it comes to having exposure to the US Dollar. It is highly correlated with the US Dollar and has enough liquidity to allow us to do whatever we want in there.
There is a downside however for those interested in making lots of money. $UUP has a one day expected move of only 0.46%. This would mean the expected profit or loss in one day in $UUP would be up or down $12 if we bought or sold $100 shares.
That would not stop us at all from having exposure to the US Dollar through the dollar ETF $UUP. It passes our test!
$USDU…The Other Dollar ETF?
Is there competition, here? $USDU is the WisdomTree Bloomberg US Dollar Fund. We are going to go through the same steps we did for $UUP and see if $USDU is a better solution here. Maybe we will be calling $USDU the dollar ETF?
What does the correlation look like here?
88 correlation. Passes our test.
We are again unable to access live bid and ask spreads for the $USDU stock but we can tell how they will be by the stock volume traded.
Whiff. Less than 50k in stock volume per day with a total notional value of $1,361,603.65. That is weak sauce. We can only assume that the liquidity in the options department is equally as terrible.
I don’t even know why $USDU got out of bed yesterday. They didn’t even compete. Who cares about notional value here.
Should we trade it? Hell no. Why was it even created in the first place? Because WisdomTree wanted to make money by offering a horrible solution to US Dollar exposure 🙂
$UUP is The Dollar ETF
Absolutely. High correlation. Sufficient stock and options volume. Tight markets. Very liquid. Want US Dollar exposure? Trade $UUP.