Overhead Supply Looms Large

From the Desk of Ian Culley @IanCulley

It doesn’t matter which way you slice it. The current market environment is a US dollar story.

Whether you’re talking about stocks or commodities, a rally in risk assets isn’t happening against a rising dollar.

It’s that simple.

You probably think I say the same thing every week. That’s because I do.

Of course, I throw in a well-defined trade setup here and there, but always within the context of the dollar and its impact on the major asset classes.

It’s that important. 

As the US Dollar Index rally is well underway, it’s interesting some individual USD crosses are finding resistance at historical levels of interest to both the currencies involved and risk assets!

Here’s a chart of the US dollar/Swedish krona cross zoomed out to the late 1990s: 

The USD/SEK is back to levels not seen since the dot-com and pandemic sell-offs. That’s right, the dot-com crash.

But, after eclipsing its 2020 highs, the USD/SEK has slipped back within its multi-decade range as overhead supply looms large.

This is a huge resistance level that also marks major bottoms in risk assets.

For instance, the USD/SEK peaked in mid-July just months before the CRB Index bottomed out, kicking off the last commodity supercycle.

Will the dollar roll over again at this historical level? 

I don’t know. But it’s hard to imagine that the CRB Index is breaking to new highs at the same time as the USD/SEK. For now, we wait and see.

Another forex cross running into an overwhelming amount of overhead supply is the US dollar/Thai baht:

The Thai baht? Really?

Yes, the Thai baht. Global stocks love to see this risk-on currency catch a bid against the dollar. 

The last time the USD/THB was at its current levels was March 2009 and February 2016. It just so happens those were critical inflection points as US stocks went on to experience historic rallies while the USD/THB fell.

Will we see another face-ripping rally in stocks now that it’s back at the scene of the crime and failing to hold new highs?

Again, I have no idea. But if the USD/THB continues to fall, my money is on "yes."

On the flip side, stocks are in trouble if the dollar continues to rip and the USD/THB is making new 14-year highs.

I’ll take it a step further. 

If the USD/THB is back above its 2008 highs, I have a hard time believing financials $XLF and home construction $ITB are holding above similar levels.

Instead, these crucial areas of the stock market are most likely falling back below their pre-Global Financial Crisis highs. To label these levels as important would be a gross understatement.

How do you think the rest of the market is performing in that scenario?

I would guess another bout of broad selling pressure is hitting stocks worldwide.

Though we don’t have definitive directional action today, one thing is certain: We must pay attention to the dollar.

Stay tuned.

Thanks for reading.

As always, let us know what you think.

And be sure to download this week’s Currency Report!