Can the Dollar Best the BRICS?

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

We’ve recently pointed out the possible double tops in the Dollar index and the USD/CAD, along with our overall outlook for further weakness from king dollar.

But can we find other areas of the market that could provide further insight into the US Dollar’s direction?

After all, many market participants are fixated on the direction of the US Dollar right now as it approaches its key mutlti-year lows.

Why does the Dollar matter so much to investors?

Firs of all, USD and risk assets have had a very strong negative correlation over the last several years. The USD Index bottomed in early 2018 as stock markets around the world peaked. Conversely, the dollar topped during the Covid sell-off when stocks bottomed out at their March 2020 lows.

To gain a clearer picture of the USD, we need to go beyond the Dollar Index and developed currencies.

Let’s look at a couple of charts of emerging currencies as they provide valuable information on broad USD performance, as well as risk-appetite around the world.

Here’s a chart of the WisdomTree Emerging Currency Strategy Fund $CEW: 

The CEW fund is a broad basket of emerging currencies, including the BRICS currencies, the Mexican Peso, the Korean Won, the Chilean Peso, the Thai Baht, and the Turkish Lira, to name a few.

This chart looks a lot like several developed currencies against the Dollar -- big bases either below or just breaking above long-term downtrend lines.

Our level is 19 in CEW. We want to be buyers if and when price breaks above the confluence of resistance at this level with an initial target of 20.75. 

Digging deeper, we assume risk assets around the world are probably catching a bid if a diverse basket of emerging currencies is strengthening against the US Dollar. 

Another chart we want to keep on our radar is our custom US Dollar vs. BRICS Currencies Index:

This index allows us to gauge the USD performance against the strongest currencies from the emerging markets: the Brasilian Real, the Russian Ruble, the Indian Rupee, the Chinese Yuan, and the South African Rand. 

As this chart trends lower, the USD is weakening vs these currencies.

Like many areas of the currency market, the USD relative to BRICS currencies is at a critical level of former resistance turned support near 19.10. This is a logical level for price to find support and potentially catch a bid.

After all, a USD bounce would make sense given the choppy year two market conditions and the recent strength in defensive assets. We should be open to this possibility!

But if we’re below 19.10, broad USD weakness is most likely creating a tailwind for both Stocks and Commodities.

That’s valuable information we just can’t ignore.

In the meantime, shoot us a note and let us know what you think.

Thanks for reading, and Premium Members be sure to check out this week’s Currency Report below.