From the Desk of Ian Culley @IanCulley
When it rains, it pours.
Markets chop sideways most of the time. This has been the reality for forex markets for much of the year.
But that’s starting to change as numerous US dollar pairs reach new 10-month highs. The dollar is taking down crucial levels while the US Dollar Index $DXY retests a year-to-date downtrend line and key former highs.
The peculiar coincidence sets up some potentially critical resolutions for these USD pairs.
If they fail, the dollar rally is likely over.
If they hold and additional USD breakouts materialize, selling pressure will intensify for many risk assets.
As of today, quite a few forex pairs are on the verge of supporting a sustained US dollar rally…
Let’s start with the second largest component of the DXY (13.6%), the US dollar-Japanese yen:
The USD/JPY is completing a six-week base as it breaks to its highest level since November.
I’m long the dollar-yen if it’s trading above 145, targeting 152.
Flipping the USD into the denominator…
We have the Australian dollar undercutting its May pivot low, reaching its lowest level since last fall:
The breakdown in the aussie supports a USD advance as data mounts in favor of Ol’ King Dollar.
The path of least resistance points lower for the aussie as it falls beneath a multi-year downtrend line (keeping it simple with a trend line).
I like the AUD/USD short toward last year’s lows, but only if it’s below 0.6450.
The New Zealand dollar looks quite similar to the aussie:
The line in the sand for the kiwi stands at approximately 0.60.
I’m short below that level with a target of 0.5575, coinciding with the October 2022 low.
Speaking of lines in the sand…
Remember the monster base breakout in the Swiss franc?
It’s starting to fail!
Swiss franc futures are sliding below the January 2021 pivot highs that mark decade-long resistance.
It’s a huge level and not the type of action investors want to see.
A fast move in the opposite direction for the Swiss franc would aid a broad dollar rally, increasing headwinds for global risk assets.
I’m not interested in shorting the Swiss franc, though it may turn into a solid trade.
Short or long, 1.1450 is the level to trade against.
Flipping the dollar back into the numerator… there we go!
The USD is running it back toward the upper bounds of its previous range against the Canadian dollar.
The USD/CAD is ripping higher after bouncing off 52-week lows and a key retracement level. The next potential resistance level rests at a shelf of former highs at approximately 1.3650.
US equity indexes likely fall under increased selling pressure if and when the USD/CAD trades back above those former highs. (It still has a ways to go.)
On the other hand, the USD/Singapore dollar looks ready to take out its year-to-date highs:
Perhaps the Singapore dollar will be the next major currency to fall against the USD.
I like buying a base breakout above 1.36 with a target at approximately 1.3925. As always, I’ll track the 14-day RSI for a confirming print above 70.
Interestingly, bullish momentum isn’t waiting for a breakout in the USD/Korean won pair.
The 14-day RSI is leading the way, registering an overbought reading above 70 as price approaches the May pivot highs from below.
I want to buy the USD/KRW pair on a break above 1,350 with an upside objective at the November 2022 highs at approximately 1,450.
All bets are off below our risk level.
Last but not least, the Indian rupee:
The USD/INR pair mounts a relentless challenge of the 83.50 level.
If and when it finally absorbs the supply at that key level, the path of least resistance turns higher toward 86.50.
There are quite a few USD pairs on the brink of flashing trade signals favoring dollar strength – if they haven’t already.
Major global currencies such as the Japanese yen, the New Zealand and Australian dollars, and even the Swiss franc have all lost critical levels versus the dollar in recent sessions.
Risk assets – specifically major US stock averages – will likely struggle if those breakouts hold.
And that selling pressure will accelerate as more US dollar buy signals trigger.
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!
