Is USD Weakness About to Get REAL?

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

A couple of weeks ago, we posed this question in a post titled "Can the Dollar best the BRICS?"

Back then, we were already leaning toward "NO." Fast forward to today, and it's more like a "NO WAY."

The reason for this is simple. In that post, we explained the line in the sand for our USD/BRICS Index was ~19.

In the few weeks since, this critical level has been violated. The market has spoken, and it's saying we're in for a lower US Dollar relative to BRIC-country currencies.

For you visual learners... This is what the chart looked like back then, and here is what it looks like now. Quite the difference, right?

This is just another data point in what's become a rather long list of evidence pointing to broad US Dollar weakness over both short and long-term timeframes. We continue to see it everywhere.

Not only has the USD violated a critical level of former resistance turned support in our custom index, but it has also broken key levels of support against the Russian Ruble, Chinese Yuan, and the South African Rand - which are three of the five BRICS Currency Index components.

As many of the BRICS currencies are starting to show strength relative to the USD, let’s turn our attention to one of the holdouts, at least for now. 

Here is the US Dollar/Brazilian Real (USD/BRL) cross which is on the verge of breaking down, just like its peers (mentioned above):

The USD/BRL cross has been consolidating in a sideways range between key extension levels since last spring. But after being rejected at the 5.90 level multiple times, it appears USD/BRL is set to follow other Dollar-denominated crosses lower, as this topping formation is pressing on its lower bounds as we speak.

Both the 161.8% Fibonacci extension and key December low are clustered around the 4.80-5 area, reinforcing its importance as the breakdown area for this rounding (or double) top pattern.

We want to be short on a decisive close below this confluence of support with a downside objective of 4.20 over the next 2-4 months.

Not only is this an excellent vehicle to express our bearish view on the Dollar, but how this chart resolves will also provide valuable insight into the direction of other US Dollar pairs, in addition to information surrounding risk appetite in general.

If USD/BRL breaks down we can envision an environment where the Dollar index $DXY itself is likely breaking down from its current double top formation. A breakdown in USD/BRL would also confirm the Dollar weakness we're seeing against the Ruble, Rand, and Yuan - as well as a handful of other Emerging Market currencies.

It’s certainly possible we could still see a bounce in the US Dollar given the choppy year two market conditions, especially if money begins to flow into bonds and the speculative fervor of the last year fully unwinds.

But this is looking less and less likely by the day as both Emerging Market and Developed Market currencies are catching a bid against the Dollar. This trend has been in place since last year and has only accelerated of late. If it continues, expect it to act as a continued tailwind for stocks and commodities.

We'll be keeping a close eye on these emerging currencies in the coming weeks and months, looking for follow-through and confirmation from other crosses.

Thanks for reading. As always, let us know what you think. 

Is the Dollar about to plunge lower from here? What does that mean for risk assets?

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