A strong sent global commodity prices plunging in the past year. And one currency trader is setting himself up to profit from further declines.
"We expect the uptrend in the U.S. dollar to continue," said TradingAnalysis.com founder Todd Gordon on Wednesday's "Trading Nation." The dollar has already surged more than 22 percent in the last 52 weeks.
So, in order to play for further upside in the greenback, and downside in commodities, Gordon looked to the land Down Under: Australia. Specifically Gordon targeted, the FXA, the Australian dollar ETF, which is down more than 17 percent in the past 12 months.
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Gordon has three reasons for looking at the Australian dollar: The country's link to Asia, the currency's correlation to commodity prices and potentially declining Australian interest rates.
"The Australian economy is tied to the performance of Asia, and any slowdown in China will certainly impact their commodity demand and impact Australian exports," said Gordon. "Additionally, commodities have been in a formidable downtrend. As we get through the start of Q2 and nonfarm payrolls, I expect the downtrend to continue—which will lead to a negative impact on the Australian economy."
Last, he noted that the Reserve Bank of Australia is "widely expected to cut interest rates," which, according to Gordon, will negatively impact the currency. "All of those things make me want to be short the Australian dollar to the downside."
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So, in order to make a bearish bet, while mitigating potential risks, Gordon turned to the options market. Specifically, he sold the May 78/80 call spread for a total of 42 cents. "The reason I did a spread was to cap my risk," said Gordon. "Remember, if you get short naked options you can get beat up if the trade ends up going against you," he noted.
When traders sell call spreads, they are making a moderately bearish bet with a defined risk parameter. In Gordon's case, the most he can make is the 42 cents he is collecting. But his trade is profitable so long as the FXA stay below $78.42 by May expiration.
"This is a play on a stronger U.S. dollar, lower commodities and interest rate policy."
