I have my theories, and they all revolve around having fun.
One thing is certain: The month of July is now behind us.
I can’t believe we’re more than halfway through the year and a month into Q3!
Since it’s August 1, let’s keep the good time rolling by reviewing the most important monthly chart in the deck…
It's the US Dollar Index $DXY.
The US dollar acted as a Chief Headwind for Global Risk Assets last year, with a little help from the Fed.
All eyes are fixated on King Dollar as it straddles an area of former-resistance-turned-support:
DXY broke down to fresh 52-week lows last month, only to almost immediately turn higher. The long lower shadow on the monthly candle highlights the reversal, indicating an underlying demand at a critical polarity zone.
If DXY closes back above its Dec. 2016 closing high of 102.38 this month, we might be dealing with a failed breakdown.
And from the looks of it, our custom USD advance-decline line (comprising 29 USD pairs) has pointed in that direction all along.
When DXY printed fresh 52-week lows, and the G-10 currency index retested its year-to-date lows, our US dollar advance-decline line had yet to undercut its pivot lows from mid-June:
Fast-forward to today, and all three lines are catching higher – DXY included.
A couple weeks of strength hasn’t erased months of meandering. But if a failed DXY breakdown comes to fruition on the heels of a swift rally, risk assets will fall under pressure.
It all depends on which risk assets we’re talking about. Commodities and cyclical value-oriented stocks will likely better withstand dollar strength since they benefit from elevated rates.
On the other hand, headwinds will increase for the major US stock indexes.
