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The portfolio was tactically long USD into the FOMC but only where positioning and valuations were most favorable (CAD and GBP). This was partially hedged through a USDCHF put.
The delivery of only a dovish hike counts as a disappointment and leaves the dollar vulnerable to superior macro-momentum outside of the US (this is bullish for European, EM and commodity FX currencies) and the downgrade to European political risk that was given added impetus by the benign Dutch election.
We look to exit tactical dollar longs, but prefer to do so opportunistically in the next week or two as both CAD and GBP have over-reacted to the Fed (and the BoE in the case of GBP) and are over-valued.
Nevertheless, bearish positions in CAD and GBP are better expressed as basket trades to avoid dollar directionality. We buy AUDCAD in cash (AUD is scarcely a high-yielder but will benefit from a burgeoning pro-risk sentiment all the same) and EURGBP in options. A bit like the Fed, timing is not ideal for prototypical BoE hawks as the economy cools.
The EURGBP call spread complements a handful of proxy EUR recovery trades (USDCHF and NZDSEK) that are starting to perform as political risk abates and ECB commentary is focusing more on its exit strategy. GBP is more vulnerable than CHF to political relief in Europe, and we keep bearish cash position in EURCHF albeit take profits on a short vol position.
