A Big Move Is Finally Coming In The US Dollar

JC Parets
October 18, 2019

It's been a while since we talked about the Dollar. The truth is, this trade has really been a Nothing-Burger all year. G-10 currencies have been a snooze-fest until just recently. I have good friends who specialize in this space and they're bored. That's not good for their business, but I have a suspicion that things are changing.

Let's get right into it. Here is the US Dollar Index breaking down on a weekly timeframe and unable to hold its previous highs. This sort of thing reminds me a lot of early October 2018 for US Stocks. From failed moves come fast moves, is how I learned it. I've also come to understand over time that this is not something to be afraid of, as many books often hint to. I think this is something to embrace. It presents the best risk vs reward opportunities of any other setup I know:

You see, what happens is that prices are able to get above a previous high, usually an important one, but then quickly fails. This is evidence that, not only is there NOT an overwhelming amount of demand relative to supply at this price but, there is actually still more supply here that has yet to be absorbed, as proved last time prices were here. In this case late 2016. I remember like it was yesterday. We were talking about it right here on this blog. Good times.

Another thing to notice on that chart above is how momentum is diverging negatively on these new highs that couldn't hold. These lower highs in RSI continue to support a much weaker US Dollar.

Here is a look at the daily chart, which tell the same two stories: Failed breakout at former resistance and a bearish momentum divergence:

To me this does not bode well for the US Dollar. Whether you trade currencies or not doesn't matter here. There are a lot of implications of a weaker Dollar. In particular, we want to see the impact it has in Emerging Markets. Think about it, if Emerging Markets are going to finally start to outperform, is that most likely happening in a weaker Dollar environment or a stronger one?

My bet is that if we're finally going to get rotation into EM, it's coming with a weaker Dollar. Here's how that looks. I like the prospects of a mean reversion in EM relative to the US:

Let's take a closer look at the US Dollar Index itself. Up top we were analyzing the ETF that actually trades. This is the Index. If you start to see this thing falling below 97.50 then it's got a problem:

And if the Dollar Index is going to fall, let's remember that the Euro is almost 60% of the whole basket. Look how this one looks. I hate to be that guy drawing random lines on charts hoping they connect somewhere. This isn't that. This one is just really hard to ignore:

Full disclosure, a one of the reasons why we've been so bullish Gold over the past year was because of a weaker US Dollar thesis. So I don't claim to be this all-knowing master of all. I get them right and I get them wrong. I think the bigger point here is that we let the data prove us wrong, or confirm that we're correct, then reevaluate and either stick to a theme or change it. It's as simple as that. In the case of the US Dollar, while it hasn't fallen this year, it certainly hasn't risen either. While we were too early on the weaker US Dollar call for sure, nothing has taken place here to prove this bearish dollar thesis to be invalid.

In fact, there is actually more data today than ever suggesting a weaker Dollar is something we should be betting on. How we take advantage of it, whether in Emerging Markets, or Euro or others, doesn't matter as much. The idea is to be on the right side of this trend somehow. Let's see if we're finally proven right. I think we could see confirmation that we're on the right side very soon. A US Dollar Index holding below 97.50 is probably that.

Let me know what you think

JC

 

 

 

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