Defense Wins Championships

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

The current market environment demands that we adhere to our risk management protocols as strictly as ever.

It’s a mess out there!

And with each passing day, more and more signs point to these challenging conditions persisting.

There is one data point in particular that we believe is likely to remain a serious headwind for risk assets: continued strength from the US Dollar.

We’ve covered this theme in detail the past couple of months as USD has rebounded against just about every major currency we track.

As always, we will continue to monitor the dollar as it is a vital piece to the intermarket puzzle.

Put simply, when investors are seeking safety in the dollar, it’s usually happening in an environment where stocks are under pressure.

Last week, we highlighted the violation of a key pivot low in our G-10 Ex-US Currency Index.

This week, we’ll revisit that chart, but with a slight twist, and then illustrate this broad USD strength using our updated trend summary table.

The chart of the US Dollar Index $DXY looks almost identical to an inverted chart of our G-10 Currency index:

The similarity makes total sense, but the recent price action raises an important question...

Now that this broad index of developed currencies has broken above its March pivot highs, will the DXY follow suit and register a higher high as well?

The longer the G-10 Ex-US Currency Index is above those March highs, the higher the likelihood the US Dollar Index will follow. We're watching the 93.25 level in DXY. A break above there would signal further strength for the USD and stiff headwinds for both stocks and commodities.

We’ll be keeping a close eye on these developed currencies as we anticipate continued weakness and follow-through to the downside in the near future.

Another way to view and contextualize the recent move in the US dollar is through our USD Trend Summary table:

The table is a sea of green, mainly when we focus on the short- and intermediate-term. This supports our bullish tactical view of USD and does a great job illustrating just how broad-based the recent strength has been.

But when we step back and look at things from a longer-term perspective, the structural trend is mixed with a primarily neutral tilt.

For now, the takeaway is simply that the US Dollar continues to gain strength and momentum, and we’re seeing no signs of this changing anytime soon.

When we place this recent USD strength within the context of what’s happening across the broader market (bonds catching a bid, risk assets stuck beneath overhead supply), it’s clear that we still want our defense on the field from a portfolio standpoint.

Remember, it’s imperative we survive these defensive battles if we’re ever going to have a chance to get on offense and put some points on the board!

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

And be sure to download this week’s Currency Report!

Premium Members can check out this week’s Currency Report below.