With the ADP numbers in hand and a handful of electoral elections going blue, I want to draw your attention to the recent strength in the U.S. Dollar, point out some catalysts, and explain the implications. To wrap up, I’ll make the case for a trade one of those catalysts should create.

Shadow Rally in the USD

After one of the worst starts for the U.S. Dollar (USD, as measured by the DXY Index) in decades, the USD is on track to breakout of a multi-month base since it broke down in April. Retaking 101.75 would be meaningful. It was resistance on the retest coming of April. If the USD continues to strength, here is what I would expect:

• Weaker Emerging Markets and International Markets Performance: strong USD has historically been a strong obstacle for ex-U.S. outperformance.
• Continued Pause for the Precious Metal Rally: gold and the USD tend to be inversely related; the same can be said of all the metal commodities. USD moving higher implies gold – along with all other commodities – should move lower.
• Weaker Performance from Specific Mid-Small Caps that Export Abroad: weaker USD has actually made U.S.-made exports more competitive. Weaker USD means relatively strong purchasing power for foreign currencies. For the first time in decades, these U.S. exports haven’t been at an outright currency disadvantage.

USD Catalysts

ADP Employment

ADP printed 42,000; rebounding from the first negative print in recent memory. This confirms the thesis Powell pushed during the October FOMC that data ex-BLS indicates the labor market is holding up. Of course, there is nuance: all of the job creation was in companies with 250 employees or more. Companies smaller than that actually contracted. In my mind, this implies two things:

• AI stealing jobs hasn’t expanded beyond the massive companies. Companies with 250+ hiring is a sign of strength and resilience. The fact they are hiring implies that have yet to turn to AI or act on plans to implement. If you’re a voting member on the Fed and don’t want to cut, you look at this data as confirmation to do so.
• Smaller sized business contracting, going into the holiday season where demand should be high, implies small-business optimism is terrible and that anticipated demand isn’t robust. If you’re a voting member on the Fed and want to cut, you look at this data as confirmation to do so.

My Take on ADP

While I would still bet on a December cut, I view this ADP result as further distorting the path.

• Tighter Fed –> Strong USD
• Looser Fed –> Weaker USD

A tighter Fed means less interest rate cuts, which tends to lead to a strong U.S. Dollar. If rate-cut probabilities continue to contract, then expect the USD to continue firming up.

Democrat’s Electoral Victory

This government shutdown wasn’t going to end until one side saw political ramifications for prolonging it.

• Abigail Spanberger — elected Governor of Virginia. She is a Democrat.
• Mikie Sherrill — elected Governor of New Jersey. She is a Democrat.
• Zohran Mamdani — elected Mayor of New York City. He is affiliated with the Democratic Party (and identifies as a Democratic Socialist).

Democrats swept. Republicans are unlikely to dismiss this as harbinger of things to come. It is time for a resolution, I think these elections will force the Republicans hand. I am sympathetic to the idea that capitulating to this pressure opens the door for closing the government to be a legitimate strategy for a minority party to exercise undue authority over the majority party at the expense of both parties’ constituents, I think most of us are aware that politicians in D.C. really only care about the preservation of their power.

I expect the reopening of the government to provide some additional tailwinds to the USD; or at a minimum, remove some interest from counter-USD assets such as gold.

The Trade: Airlines

The news has been filled with reports of air traffic controllers taking sick leave or outright quitting as their paychecks have been on hold during the government shutdown. Few air traffic controllers means fewer flights per days for U.S. airlines. Fewer flights means less revenue. While the JETS ETF – a collection of airlines – is enjoying a nice morning, it hasn’t been a fun a month to be a shareholder:

The trade is simple:

Government Reopens → Airlines Get a Relief Rally

For what its worth 40% of this index is made off of Southwest (LUV, 11.5%), Delta (DAL, 10.5%), United (UAL, 10%), American (AAL, 9%). LUV, as the most exposed to domestic travel, has the most the gain, but it also the worst performer month-to-date. I view it as the “beta play” in this trade. I view DAL as the best-in-breed, but can’t deny I like the chart of AAL the most.

I am not in this trade in any capacity… yet. Personally, I am looking at 1-2 month, out-of-the-money (OTM) call options on LUV (the high-risk, high-reward play) and AAL (the best looking chart). However, if I were to play this through stock – and not options – I would wait for the JETS ETF to retake the 100d SMA at $24.74.

No trades are without risk, and I see two: both have to do with timing.

1. The airlines move lower before the government reopens or because there are further delays. So, even if we see a relief rally, it comes off a lower level and doesn’t create an adequate profit relative to the risk.
2. The government reopens and the pop sold in the premarket.

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