Rapidly rising interest rates last year saw stocks and bond prices fall heavily.
However, against this backdrop, another sector soared.
The Fed raised rates more aggressively than other central banks. And as a result, the U.S. dollar strengthened against other major currencies, including the euro.
Yesterday, we saw how the Invesco CurrencyShares Euro Trust ETF (FXE) fell nearly 25% against the U.S. dollar from its 2021 high.
But with that down move exhausted by late September, FXE bounced back. It rallied heavily into the end of last year.
Today, I want to show how we traded that countermove to generate a blended 37.7% gain…
Changing Narrative
Inflation came in lower than expected in October last year. That represented its fourth monthly decline in a row and brought inflation to its lowest rate since January that year. As such, the narrative around interest rates began to change…
The market started to buy into the story (yet again) that the Fed would soon begin to “pivot” on rates… That after its rapid-fire series of 0.75% rate increases, the Fed would start taking it easier.
You can see how that transition played out in the chart of FXE below after it bottomed out in late September…
Invesco CurrencyShares Euro Trust ETF (FXE)
Source: eSignal
However, several things about the move didn’t stack up…
Annual inflation was still stuck just below 8%. The Fed still had a ton of work (future interest rate raises) to bring inflation back under control.
Fed Fund rate expectations at the time showed another 100 basis points (1%) of rate raises to come.
Plus, the chart hinted the counter-rally in FXE was running out of steam…
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The Relative Strength Index (RSI) was in overbought territory (red circle), and a reversal could provide the setup for a mean reversion trade.
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After opening higher on November 15, FXE continued to fall throughout the day. That meant FXE’s price action was not following through.
Given these factors, we entered a short position on Tuesday, November 15, by buying put options on FXE. Note that a put option increases when a stock price falls.
And right from our entry, the trade went our way…
The RSI reversed out of overbought territory (upper grey dashed line), and FXE made lower highs over the following days… closing each day at a lower price.
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When to Take Profits
FXE gapped down on Monday, November 21, turning our trade nicely profitable. So we closed out half our position for a 47.5% gain.
Take another look:
Invesco CurrencyShares Euro Trust ETF (FXE)
Source: eSignal
We kept half our position open because a bounce in Treasury yields at the time looked like it might send the euro into another leg down.
However, yields continued to drift. So we closed out the remaining half of our put options the following day for a 27.9% gain.
Altogether, we were in and out of the FXE trade in a week for a blended 37.7% gain.
To be clear, we generated this return using options. But this trade shows that even smaller countermoves can offer us quick profits.
You just need to identify the right setups (like this euro trade) and trade them… And options aren’t the only way to tackle currency movements like this.
Forex (foreign exchange) trading gives us a unique way to profit as pairs of currencies strengthen or weaken against each other.
Forex can help you potentially make thousands a month… And you can get started even with a relatively small portfolio.
In my 35-year career, I have traded more than $500 billion worth of currencies. And I’ve learned the best strategies and setups to trade them.
Right now, we’re seeing this market open up with lots of new opportunities as interest rates shift… and the stock and bond markets stay volatile.
That’s why I’m preparing to open up this kind of trading to my readers at a special event I’m calling “Currencies in Crisis”…
I want to help you understand what makes forex unlike any other kind of trading you might be used to, how to use appropriate risk management, and more.
If you’d like to see how I trade currencies – and the massive potential this market offers right now – then please click here to automatically sign up to join me on Wednesday, April 19, at 8 p.m. ET for my special event.
I hope to see you there!
Regards,
Larry Benedict
Editor, Trading With Larry Benedict