From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The US Dollar Index $DXY is pressing to new highs, disregarding what many think it should be doing based on historic intermarket relationships.
Considering the bullish developments and new highs from risk assets, the strength from the US dollar continues to be a head-scratcher.
But will the breakout in the DXY hold, or will it roll over and confirm the signals coming from bonds, stocks, and commodities?
When we broke down the US Dollar Index last month, we pointed out that its strength was rather narrow in terms of how it was performing relative to most individual currencies. Long story short, the recent rally in DXY has been fueled primarily by its two largest components -- the euro and the yen. These two currencies make up more than 70% of the DXY weighting, and the fact that they are at new 52-week lows explains why the index is at new highs.
But we're still not seeing the same kind of strength when we look at most other dollar crosses.
As we continue to make sense of the dollar rally, let’s take a look at two USD crosses that will provide valuable information in the coming weeks.
First up is the USD/SEK pair:
The Swedish krone only amounts to 4.2% of the index weighting. Though it’s nowhere near the weighting of the euro, it’s still a major developed currency.
Unlike the euro and many other US Dollar Index components, the USD has yet to reach new highs against the krone. Instead, the USD/SEK continues to run into resistance near 8.75.
This level demands our attention.
A decisive break above this area of overhead supply could provide an excellent trading opportunity. We want to be buyers above 8.80 with an upside objective at the former 2020 highs around 10.43.
On the other hand, as long as USD/SEK is stuck below the 8.75, 8.80 area we have no business trading it from the long side.
We also have to question the validity of the DXY breakout if it isn’t being supported by breakouts from pairs like the USD/SEK and others.
Speaking of other crosses we're keeping an eye on, here's the USD/INR:
If the US dollar is entering a sustained rally, it’s likely to be resolving higher against the weaker emerging market currencies. But it's not.
Similar to the USD/SEK, overhead supply continues to keep a cap on the USD/INR as it churns below its former highs around 75.81.
The USD/INR taking out its year-to-date highs is likely to occur in an environment where dollar strength is broadening. It hasn't happened yet, but we want to be prepared for it.
If and when it does break above 75.81, we're buyers on strength with a target of 86.70. Our outlook is neutral until then as price remains range-bound.
Both of these crosses offer great potential trade setups with risk/reward heavily skewed in our favor. But the dollar still has work to do before we want to put these trades on.
In fact, it still has work to do to prove this breakout in the DXY is even sustainable -- or representative of true and broad dollar strength.
Here's what we do know...
The euro, the yen, and even the pound are getting slaughtered. They look like charts we want to be selling.
On the flip side, there are plenty of currency charts that are messy and riddled with significant overhead supply for the dollar to work through.
The USD/SEK and USD/INR are two crosses that fall into this category. Not only should they provide us with critical information regarding the strength of the USD in the coming weeks. They're also some great potential trading opportunities.
Stay tuned! We’ll continue to keep you updated.
Thanks for reading. As always, let us know what you think.
And be sure to download this week’s Currency Report!
