From the Desk of Ian Culley @IanCulley
A weaker dollar remains a key ingredient for a risk-on rally. Yet, like interest rates, the buck refuses to roll over.
The US Dollar Index $DXY continues to hover well below last year’s peak, holding within a tight range for the past four months.
Today, we’ll review critical levels for DXY as this trendless action defines the chart.
We’ll also look beneath the surface for signs of broad strength or weakness and revisit a binding intermarket relationship for clues regarding the dollar’s next major move.
First, let’s define the critical boundaries of DXY’s multi-month range:
The 105 level has proven a significant area of resistance.
On the flip side, the February pivot lows at approximately 101 mark the lower boundary of the year-to-date range. That’s where we find DXY today.
If and when the dollar index undercuts these pivot lows, a broad risk-on rally likely ensues, especially for long-duration assets and precious metals.
We’re monitoring the 14-day RSI for an oversold reading, indicating the bears have taken control of the market. A confirming RSI signal increases the likelihood of further downside action – something we have yet to witness, even during the initial sell-off.
Other data points that should lead or confirm the next leg lower in the dollar include the G-10 Currency Index and the US dollar advance-decline line.
Here’s a triple-pane chart depicting both with the US Dollar Index:
The G-10 index and US dollar advance-decline line don’t technically look beneath the surface of DXY, given the dollar index consists of only six currency pairs.
Instead, these charts provide a broader scope of dollar strength or weakness.
Unlike DXY, both charts hold well above their lows from earlier in the year. This reveals a lack of broad USD weakness, suggesting more near-term sideways action for King Dollar.
Broad dollar weakness should accompany a DXY breakdown below 101. If and when DXY does roll over, and the G-10 index and USD advance-decline line do not print fresh year-to-date lows – expect a short-lived dollar decline.
But, honestly, that will only matter once rates turn lower.
The US dollar and interest rates have driven the market narrative for more than a year. And that remains the case despite their uptrends becoming trendless ranges in recent months.
Check out DXY and the US 10-year yield overlay chart with a rolling 126-day correlation study in the lower pane:
A significant positive correlation between the US 10-year yield and DXY has remained intact since late 2021. This correlation will eventually decouple, as most market relationships do. But we don’t want to make that bet any day soon.
It’s clear the market is still contending with a rising rate environment. As long as that remains the case and yields continue to hold above their year-to-date lows, DXY likely follows suit.
All investors must monitor these charts because the broader market isn’t making a decisive leg higher while rates and the USD loiter.
Yes, sentiment and positioning set the stage for a rip-roaring rally in the S&P 500 $SPY. And, yes, stocks and other risk assets stopped going down months ago.
Nevertheless, the probability of SPY trending above 420 or gold printing new all-time highs dramatically increase with DXY below 101.
What do you think?
Are we overreacting? Is DXY not an essential chart today?
Let us know. We love hearing from you!
Thanks for reading.
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