From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The rally in the US Dollar Index $DXY is stalling out.
With each passing day, dollar internals are weakening, and the prospect of a bullish resolution from the current continuation pattern in DXY is diminishing. We expect these patterns to resolve quickly. And when they don’t, that’s information.
Some other things worth noting are that commercial hedgers hold a large short position in DXY futures and the near-term bearish trend for individual dollar crosses is expanding (up 20% from last week to a staggering 80%).
The bottom line is evidence continues to stack against the USD.
With that as our backdrop, let’s check in on a long USD trade that was triggered in November and outline how we want to navigate the coming days and weeks.
Toward the end of the year, we covered a couple of key levels that the dollar needed to clear to increase our conviction in its current rally. One of those was the 8.80 level in the USD/SEK cross.
The dollar managed to break out against the Swedish krona, and we bought the move with a target at the former 2020 highs around 10.43 (over longer time frames). Since then, it's formed a tight consolidation above the breakout level, but just below a key resistance level.
These types of patterns offer great opportunities to add leverage to our positions -- or to get in if we missed the initial breakout. If and when the USD/SEK pair breaks to new 52-week highs we can do just that.
We want to extend leverage in our long position, but only on strength above 9.217 with a more tactical target of 9.572 and a longer-term objective near the 2020 highs.
On the other hand, we need to be prepared for a resolution in the opposite direction -- especially given the waning strength of the USD. After all, we continue to see more and more failed breakouts in various USD pairs.
If and when the USD/SEK cross loses the lows of its current range around 8.993 we have no business being long. At the same time, we don’t necessarily want to flip the book short if price is trading toward the middle of an 18-month trading range.
The best course of action would be to go flat and book some gains as there are better risk/reward setups elsewhere.
So, which way will the USD/SEK pair resolve from this flag?
Who knows? But it’s impossible to ignore the mounting evidence against the current dollar rally. And seeing USD fail against yet another currency would be significant information.
It’s also interesting that the other hurdle the USD needed to clear from our note in November -- the 75.81 level in the USD/INR -- resulted in a nasty failed breakout in recent weeks. That's one more reason to clamp down on risk and protect open profits.
We’ll be prepared regardless of how these current consolidations resolve. And we’ll continue to keep you updated as more information becomes available.
Stay tuned!
As always, let us know what you think.
And be sure to download this week’s Currency Report!
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