Will DXY Recapture the 105 level?

From the Desk of Ian Culley @IanCulley

"Buy stocks if the US Dollar Index $DXY trades below 105!"

Simple and straightforward. That was our roadmap back in early March.

Now, almost three months later, the dollar is putting that strategy to the test as it approaches 105 from below.

That multi-month consolidation with “continuation pattern” written all over it never continued lower.

Instead, the dollar index has chopped sideways within a tight range for almost six months. And the evidence is beginning to support a possible upside resolution…

The lack of broad US dollar weakness caught my attention back in April. 

Our G-10 currency index and US dollar advance-decline line were printing potential higher lows, while DXY was on the verge of undercutting pivot lows from earlier in the year. The divergence suggested burgeoning USD strength.

Interestingly, DXY has gained roughly 3.5% since.

The G-10 index is now posting a series of higher highs and higher lows as DXY nears the upper bound of its range:

It doesn’t mean DXY will follow higher, of course, but I highly doubt these two lines will diverge for an extended period. 

While our custom index gives us a slightly broader scope of the USD, it’s solely based on the inclusion of the Norwegian krone and Australian and New Zealand dollars – all commodity-centric currencies.

Since commodity-centric currencies were some of the most resilient during last year’s dollar rally, I expected strength from these currencies to signal a sustained DXY breakdown. Those signals never came.

Check out the triple-pane chart of the Canadian, Australian, and New Zealand dollars:

The July pivot lows mark my level of interest. 

The kiwi and the aussie recaptured those former lows late last year, following the DXY peak in September. But it’s been a range-bound mess since, with the loonie unable to reclaim its respective lows.

Fast-forward to today, and all three are trading below our risk level. I have to imagine the US dollar will benefit if these currencies continue to fall.

On the other hand, weakness among commodity currencies could have more to do with falling commodity prices and the potential for lower rates.

Regardless, the US Dollar Index continues to chop sideways, much like interest rates. "The dollar and interest rates" – the 2022 mantra with staying power.

It’s funny – tech stocks don’t seem to care about the recent dollar strength or rising interest rates. 

Perhaps the intermarket relationship between stocks and the dollar will decouple (as correlations tend to do). 

Or growth stocks are calling the dollar’s bluff, and DXY won’t see the other side of 105 any time soon.

Stay tuned.

Thanks for reading.

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