The CAD Sidelines the DXY

From the Desk of Ian Culley @IanCulley

Dollar bulls, be warned!

The US Dollar Index $DXY is sliding toward the lower bounds of a multi-month range. 

Yes, it’s still a sideways mess. And it will remain a mess as long as its former support level holds.

But based on the most recent data, my money is on a downside resolution for King Dollar.

Especially when I consider last week’s breakout in Canadian dollar futures…

Besides the DXY trading below 101, I’ve monitored two key data points for confirmation of continued dollar weakness:

• the euro trading above 1.08, as it constitutes over 57% of the DXY (though recently it’s challenged a 1.10 handle); and
• commodity currencies, including the Australian, Canadian, and New Zealand dollars, reclaiming their respective July pivot lows.

It’s difficult to imagine the DXY ripping higher if its dominant component is completing a bearish-to-bullish reversal. Which the euro is.

Check.

On the other hand, the AUD, CAD, and NZD represent risk-on currencies.

So a break back above last summer’s lows signals increasing risk appetite and expanding participation beyond the components of the dollar index.

Check.

Yes, we can check both boxes for the first time since the dollar peaked last year.

Here’s a triple-pane chart of the AUD, CAD, and NZD, highlighting the 2023 July pivot lows:

If these commodity currencies continue to trend higher, it’s easy to envision dollar weakness broadening as the index slides below that crucial 101 level.

Meanwhile, I like trading the breakout in the Canadian dollar.

Check out Canadian dollar futures completing an eight-month bullish reversal:

As long as the September contract holds above 0.7550, I’m long with an initial target of 0.77 and a secondary objective at approximately 0.8325.

The CAD joining the AUD and the NZD above last summer’s lows represents a critical piece of evidence missing from my “bearish dollar” thesis.

My structural and tactical outlook for the dollar points lower. It’s a bias I hold with high conviction despite the absence of a decisive breakdown in the DXY.

Yes, the US dollar has been behind in the count before.

But, with emerging market currencies also posting fresh 52-week highs, perhaps it’s time for King Dollar to take a seat.

Stay tuned!

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