From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Copper is challenging the lower bounds of its range.
The AUD/JPY is attempting to reclaim former support.
And the S&P 500 is digging in at the AVWAP from its COVID lows.
These are some of the most important charts and levels in the market right now.
But there’s one chart that tops them all…
In our view, the US Dollar Index $DXY is the key to this market.
It’s currently struggling to resolve higher from a multi-year base after reaching its highest level since 2002.
The breakout could stick and lead to a sustained uptrend. Or, it might fail. Either way, the outcome will have wide-ranging impacts on risk assets.
If the breakout from this multi-year double bottom is a valid one and the dollar continues to trend higher, we’ll continue to see downside pressure for the majority of risk assets.
The negative correlation between the USD and equities – both domestically and abroad – has strengthened as risk has come off the table in recent weeks.
And we see no reason why this relationship should not persist in the future.
On the flip side, if the upside resolution in the DXY turns into a failed move, it would provide global stocks and commodities with a much-needed boost.
In this environment, we’d imagine investors begin embracing more risk and stop hiding out in the dollar for safety.
Volatility is likely coming off under this scenario.
And, more importantly, stocks are probably getting back in gear. As for other risk assets, things like copper are probably holding their ranges, and maybe even testing the upper bounds.
In other words, a failed breakout means the current US dollar headwinds would become tailwinds.
Which will it be?
A breakout and sustained rally that puts more pressure on risk assets?
Or a failed move and resolution lower that takes pressure off risk assets?
It’s hard to say. That’s what makes this chart so incredibly important.
As of this writing, the DXY is slipping back below its 2017 highs near 103.82 and into its prior range. That’s not the most encouraging price action for dollar bulls.
However, a couple of days don’t make a trend. And resolutions from multi-year consolidations can get messy and take time.
For now, we have to err on the side of the underlying uptrend and give this DXY breakout the benefit of the doubt.
If and when we get downside follow-through below 103, then we’ll have a data point supporting a rebound in stocks.
We’ll keep the US dollar front and center until a decisive break in either direction takes place.
And we’ll let you know what the verdict is as soon as we get it.
Stay tuned!
As always, let us know what you think.
And be sure to download this week’s Currency Report!
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