USD Weakness Evaporates

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

Earlier in the month, we pointed out breadth deterioration in the US dollar.

While the dollar pressed to new highs against the yen, the pound, and the euro, it struggled to gain ground against commodity-centric and emerging market currencies.

The lack of broad strength had us questioning the validity of the recent rally in the US Dollar Index $DXY. 

That’s changed recently.

Today, the dollar index is catching to new highs against a backdrop of broadening strength, not weakness. Now that we’re seeing dollar internals flip and start to confirm these new highs from the index, this is not a trend we want to fight.

And, to be clear, we haven’t been. 

While we’ve been skeptical of the rally in the DXY, we’ve expressed a bullish view on the dollar via the major crosses. They’ve been the weakest links and main drivers of DXY strength.

And now that we’re seeing dollar strength expand, we have more options to express a bullish thesis. 

Let’s talk about one of those now.

First, here’s a chart of DXY with the US dollar advance-decline line in the lower pane:

When we covered the advance in the US Dollar Index earlier in the month, the A-D line was chopping sideways, failing to confirm the new highs.

Fast-forward three weeks and this divergence has cleared itself up. The A-D line is now making new highs along with the DXY.

This speaks to strengthening dollar internals and supports the current uptrend in the dollar index.

When it comes to betting on this dollar strength, we don’t have the best entry points in a lot of crosses right now due to the recent strength. 

However, the Singapore dollar is approaching a logical level where we can define our risk and take a shot. Here’s a chart of the USD/SGD:

The USD/SGD is pressing on the upper bounds of a multi-year base with momentum firmly in a bullish regime. We want to get long if and when it reclaims its former highs at this key Fibonacci retracement.

We’re buyers on a breakout above 1.3725 with a target of 1.4075. But we can only be long above the October 2021 highs. The USD/SGD is off limits on any break back within its current range.

If and when we get an upside resolution, we’ll be looking for momentum to confirm the breakout with an overbought reading. We think it happens any day now.

From a bigger-picture perspective, it’s time to backburner the idea of a potential catalyst entering the market in the form of a weaker dollar. 

Now that we’re seeing other currencies roll over against the dollar, we want to position ourselves for an environment where dollar strength is likely to broaden out and persist. 

Thanks for reading!

As always, let us know what you think.

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