From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
King Dollar is reasserting its reign at the expense of major global currencies and risk assets.
What started as a potential failed breakout last month is proving no more than a hard retest, as the US Dollar Index $DXY broke to fresh 20-year highs yesterday.
Even the most resilient currencies, such as the Canadian and Australian dollars and the Mexican peso, are losing ground against a surging USD.
As we’ve pointed out, this is not an ideal scenario for risk assets – particularly stocks.
Yesterday’s price action was a great example – dollar up, stocks down.
This is not a coincidence.
Let's zoom out and analyze the dollar’s recent strength and then discuss what it means for these other asset classes.
Here’s a daily chart of the US Dollar Index:
As you can see, last month’s resolution above the former 2020 highs was followed by a strong throwback below the breakout level.
Now that DXY has reclaimed that key level while printing fresh multi-decade highs, we'd like to see confirmation in the form of a 14-day RSI reading above 70.
Also, note the bottoming pattern the dollar index carved out last spring. It just so happens the dollar stopped going down last year around the same time most stocks stopped catching higher.
Coincidence?
This dual pane chart of the Russell 2000 index ETF $IWM and Value Line Geometric Index $VLG highlights topping patterns that reflect the inverse action in the DXY:
Both VLG and IWM peaked in early November last year – the same time the DXY resolved higher from a multi-month base. Since then, the dollar has caught a steady and relentless bid as risk assets have come under increased selling pressure.
As long as the dollar holds the high ground, stocks and other risk assets are likely to continue to struggle.
In theory, this would mean lower prices for commodities as well. But unlike stocks, most commodities are in strong primary uptrends and have shown little to no signs of slowing down.
At a certain point, if the dollar keeps moving higher, we're going to see commodities feel the pain too. Whether we're at that level now or not, we don't know.
But the coming weeks should supply plenty of information.
On the other hand, the outlook for equities appears dismal as the median stock (VLG) is failing to reclaim its former 2018 highs, and small-caps (IWM) are also losing their respective levels.
If these stocks aren’t doing well, we can’t expect a relief rally – let alone any sort of tradeable low that could lead to a sustained uptrend.
We’re left with a simple choice:
- either cling to short-term breadth thrusts and any other hopeful signs marking a bottom; or
- accept the weakness in risk assets and monitor the intermarket landscape along with all the insight it provides.
We choose the latter. And, for us, that means paying attention to King Dollar and the currency markets, among other things.
If and when the dollar does roll over, we can look for a reprieve in the selling pressure. But, for now, that simply isn’t the case.
With the DXY breaking out and establishing a new and higher range, it looks like lower for longer for stock markets around the world.
Stay tuned!
Thanks for reading.
As always, let us know what you think.
And be sure to download this week’s Currency Report!
