From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
King dollar is sitting perched upon its throne. But the floor beneath it is beginning to crumble.
The rally in the US dollar index $DXY isn’t as strong as today's fresh highs would suggest. In fact, when we dig beneath the surface, the dollar is only trending higher against a few currencies over shorter timeframes, while underperforming the vast majority.
Conveniently, the handful of currencies the USD continues to best are the most heavily weighted components of the US dollar index.
This lack of internal strength can be seen pretty much anywhere outside of the chart of DXY itself. Whether we're looking at our USD trend summary table, our custom USD advance-decline line, or the individual crosses themselves, it all suggests the current trend in the dollar lacks support.
Let’s take a look.
Our USD trend summary table illustrates both the broad weakness as well as those critical areas of strength that are driving the current uptrend in the DXY:
Before we highlight all the red on the table, let’s focus on the few green/blue areas.
The only currencies the dollar has short-term bullish trend readings against are the Japanese yen and the British pound. They make up 13.6% and 11.9% of the DXY, respectively.
The Euro is showing a current reading of neutral, but if it stays where it is it will flip to bullish in the coming days. This is important because it’s the primary component, claiming more than 57% of the index weighting.
The bottom line is this... The same currencies that have been consistently losing ground against the dollar are driving more than 83% of the US dollar index. As such, the DXY has become a misleading representation of what's really happening with the US Dollar these days.
Can the index keep chugging higher? Of course, it can. But the dollar can continue to weaken against most currencies while it does. It's important not to use the DXY's performance as evidence of USD strength.
That brings us to all the red in the above table. The USD is falling against commodity-centric currencies from both developed and emerging markets. We see it in the USD/BRL, USD/MXN, USD/CAD, and the AUD/USD, to name just a few.
The scope of this weakness is even more apparent when we construct an Advance-Decline line consisting of 29 USD pairs:
Instead of following the uptrend in DXY higher, our A/D line is presenting a bearish divergence by carving out a slightly lower higher. This speaks to the broad near-term weakness and supports what we’ve already gathered from our USD trend models: Breadth is deteriorating for the US dollar.
These aren’t the hallmark signs of a healthy uptrend. In fact, it’s the complete opposite. This kind of development tells us we don't want to trust this rally at all. It is logical to think EUR and GBP will soon get their act together and start outpacing the dollar just like the remainder of the forex world is.
If and when this happens, the dollar index will inevitably roll over and this weakness should create a major tailwind for risk assets. Commodities will continue to blast higher and stocks will get back on track in both the US as well as abroad. While this kind of action would make sense, we're yet to see it unfold this way. DXY just made new 52-week highs today...
It's important to remember that the DXY is not the US Dollar. Nor is it a good representation of how the Dollar is faring versus most currencies. It is just an index.
As long as this US dollar weakness continues to spread, it's only a matter of time until the floor gives way beneath the DXY. For now, it's just barely holding on by a Euro and a Yen...
We’ll be sure to keep you updated on this crucial development. Stay tuned!
