From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Major world currencies continue to struggle against the US dollar.
Both the euro and British pound have been coiling near 52-week lows against the dollar. We’re also seeing weakness spread among commodity-centric currencies, as the Canadian dollar hit new 52-week lows this week, and the Australian dollar accomplished the same earlier in the month. As for the safe-haven Japanese yen, USD/JPY hit its highest level since 2017 at the end of November.
The bottom line is that we continue to see broad strength from the greenback.
Meanwhile, the US Dollar Index $DXY continues to consolidate within a tight continuation pattern.
As we wait for a resolution either higher or lower, we can look to these individual forex pairs for an indication of which direction we’re likely headed.
Let’s revisit the potential failed breakdown from the Australian dollar earlier in the month and the recent action in the Canadian dollar for clues.
Below is an overlay chart of the AUD and the CAD:
When viewed side by side, we can see how closely these two markets move together. So when we observed a potential failed breakdown in the AUD a couple weeks ago, we not only wanted to see a quick reversal higher in the aussie; we also wanted to see strength in the loonie.
Fast-forward to today, and we’ve yet to see either. In fact, the exact opposite has taken place. The AUD has been going sideways for the past few weeks now and is simply consolidating around its former lows. So rather than a failed breakdown, this now looks like another bearish continuation pattern.
As for the CAD, instead of holding above potential support, it just broke to fresh 52-week lows and is now confirming the bearish action from the AUD.
Earlier this month we said if the Australian dollar hangs out at the lower bounds of its range, it probably means we’re in for more messy action from risk assets. And that seems to be the case for now. Although, when we factor in the recent action in the CAD, the likelihood of further downside for risk assets is only heightened.
Seeing further selling pressure in risk-on currencies not only suggests continued dollar strength. It also speaks to a deterioration in risk appetite. We’re also seeing confirming evidence of this development from some of our intermarket ratios such as discretionary versus staples and stocks versus bonds.
Here’s a better look at the Canadian dollar now. It's flashing a sell signal as it breaks down and registers its lowest close since last November.
We want to sell weakness in Canadian dollar futures below 0.7750 with a downside target around 0.7250 over the next 2-4 months.
The short setup in CAD is only valid if it’s below our risk level. If we reclaim the former lows, we have to be on high alert for a fast move in the opposite direction. With that said, we think the odds favor the CAD mimicking the AUD and chopping sideways here a bit.
Similar to the AUD/USD trade outlined earlier in the month, the CAD is off-limits on any corrective action back within its prior range. As much as we like failed moves, the markets continue to challenge and frustrate most participants in these messy conditions. The last thing we want to do is get chopped up trading a range.
We’re either short CAD futures or sitting on the sidelines waiting for more information.
If we’re shorting two of the world’s leading commodity-centric currencies, what does that tell us?
It’s definitely a point for the bears as commodities and cyclical stocks most likely remain under pressure in such an environment. It also probably means that the US Dollar Index is resolving higher.
In our opinion, what started as a potential failed breakdown in the Australian dollar has morphed into a false start, so we're anticipating an eventual downside resolution from this topping pattern.
Seeing the Canadian dollar follow in its footsteps is solid confirmation that the path of least resistance remains lower for risk-on currencies... and higher for the dollar.
We’ll continue to monitor the Canadian dollar along with the Australian dollar and other commodity currencies for hints of when this burgeoning US dollar strength might be cooling off. For now, there is no sign of it.
Thanks for reading!
As always, let us know what you think.
And be sure to download this week’s Currency Report!
