Track These Levels as the Dollar Bounces

From the Desk of Ian Culley @IanCulley

The US Dollar Index $DXY is the most important chart in the world, again.

But, honestly, when is it not?

There’s no hiding from King Dollar.

It’s true: Currencies are not considered one of the three major asset classes (bonds, stocks, and commodities).

Nevertheless, fluctuations in the US dollar impact every asset worldwide – especially stocks and commodities. 

And the probability of renewed headwinds for risk assets is increasing as the failed breakdown in the dollar could have legs…

Check out the triple-pane chart of the DXY, our G-10 currency index, and the US dollar advance-decline line:

Our US dollar A-D line went from failing to confirm the DXY breakdown last month to posting new multi-year highs this week.

To be clear, the level of the advance-decline line is not as important as the trend, which is undoubtedly higher.

These new highs indicate broadening dollar strength as more global currencies lose ground to a resurging USD. 

The Canadian dollar breakout was short-lived. The British pound recently turned lower at our target, coinciding with a confluence of resistance. And the euro slipped back below its May pivot highs.   

The advance-decline line takes it further, capturing the weakness among Emerging Market currencies – and the failed breakout in the WisdomTree Emerging Currency Fund ETF $CEW jibes:

CEW is sliding back below a critical level of former-support-turned-resistance, unable to hold last month’s upside resolution. 

Based on the charts we covered in today’s episode of What the FICC?,  I can envision multiple base breakouts across the forex markets favoring the US dollar – from the South African rand to the Korean won.

With the USD building constructive bases against emerging-market currencies, let’s bring it back to the US Dollar Index and the levels to track in the coming weeks.

I’m watching the July pivot highs as a potential confluence of resistance, aligning with a downtrend line:

The US stock market indexes are likely under increased selling pressure if the DXY reclaims those early summer highs. 

Opportunities will continue to present themselves beneath the surface, of course. I’m mainly watching energy, though industrials, financials, and materials belong on the list.

But vigilance quickly turns to extreme caution if the DXY is flying above 105 to fresh year-to-date highs.

Stay tuned!

Thanks for reading.

Let me know what you think. I love hearing from you!

And be sure to download this week’s Currency Report!