From the Desk of Ian Culley @IanCulley
Everyone wants to know where the dollar is headed next.
It’s great investors are showing interest in the dollar, while understanding the impact it has on risk assets at the moment.
But I have no idea where the dollar is headed. No one does.
Regardless, I can still form a framework to help make the best logical guess despite an incomplete data set. That’s what we do at All Star Charts!
So let’s recap three points I’ve made regarding the dollar in recent months that I believe hold the greatest weight…
The Time and Place for a Bounce
Given strong seasonal tailwinds and a critical shelf of former highs acting as potential support, the likelihood of a dollar bounce last month seemed probable…
The US Dollar Index $DXY has enjoyed the best returns during January based on forty years of historical data – hands down.
Instead of falling in line with its average return of approximately 1%, the DXY dropped roughly 1.5% last month.
I pay close attention to seasonality for this type of information. It’s a major "heads up" when an asset doesn’t conform to strong seasonal tendencies.
It shows in the price chart:
Those former highs didn’t get the “potential support” memo. I don’t really care either way. But, again, this is crucial information.
The market gods provided the best scenario for the DXY to gain ground last month and it failed, miserably.
That’s strike one.
The Euro Has the Answer
The euro provides another key piece of information.
Last month, the euro ran into a logical level of resistance at approximately 1.08.
My hypothesis at the time was simple: If the EUR/USD trades above that level, then the dollar will find it difficult to sustain a rally.
It made sense to me, given the euro comprises 57.6% of the DXY.
Well, less than a month later, the euro is trending back above the former resistance level:
No wonder the dollar can’t catch a bid!
The question now is whether former resistance will turn into support. Nevertheless, I like the EUR/USD long toward 1.1450. But only if it remains above 1.08.
Strike two!
Commodity Currencies Will Confirm
I turned my attention to commodity currencies as the initial dollar decline began to pause in late November.
If a sustainable downtrend in the DXY were to take hold, the most resilient currencies during the dollar uptrend (commodity currencies) should’ve also moved higher.
I used the July 2022 pivot lows as my line in the sand:
The way I see it, the Canadian, the Australian, and the New Zealand dollars need to reclaim those former lows and trend higher. It’s what I expect in an environment where the USD weakens.
These charts have been messy. Yet the message is clear. The aussie and the kiwi have taken back their respective lows, whereas the loonie has found resistance. The CAD represents the only missing piece.
Foul ball?
My best logical guess for the US dollar remains lower based on the evidence from the past few weeks and the market’s response to today’s FOMC meeting.
Sure, you could argue the dollar is hanging tough. But I don’t think it got a piece of that last foul ball.
What am I missing?
Is the dollar about to rip in my face?
Let us know what you think. We love hearing from you!
Thanks for reading.
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