From the Desk of Ian Culley @IanCulley
It’s a new year with unlimited possibilities!
Even ol’ King Dollar is turning the page, embracing 2024 and everything it offers with open arms. It’s shaken off the selling pressure from 2023 and appears ready to turn over a new leaf.
But a bigger dollar rally might need a little help from a nearby friend.
More on this idea in a second.
First, let’s check out the US Dollar Index $DXY chart…
The DXY is finding its footing following a brutal holiday season (dropping nearly 5 percent since November 17):
The DXY stopped catching lower right where we would expect: a shelf of former lows at approximately 101.
A period of US dollar strength would make sense as the DXY mean reverts higher, especially as it enters its most favorable month of the year.
Dollar strength likely means our recent bearish USD trades aren’t working. (Which they are not.)
A sustained bounce in the dollar could also usher in an increase in stock market volatility measured by the $VIX.
But it all depends on the Mexican peso.
Yes, the peso…
Here’s the US dollar-Mexican peso pair overlaid with the VIX:
If the near-identical lines in the upper pane don’t tell the story, the 63-day rolling correlation study in the lower pane conveys the message…
The USD/MXN and the VIX trend along the same lines.
Stock market volatility rises and falls with the USD/MXN. And from the looks of it, the USD/MXN is poised to follow DXY to the upside.
The 14-day RSI completed a bearish to bullish reversal in momentum last fall while price violated a yearlong downtrend line.
Fast forward to today, and momentum is printing a bullish divergence while holding within a bullish regime.
Bulls remain in control of the US dollar-Mexican peso if the repeated ringing of “bullish” hasn’t given it away.
I imagine the dollar is gaining on the peso in an environment where DXY is catching. It hasn’t always been the case over the past couple of years. But the USD/MXN is attempting to turn the corner and rally.
I expect stock market volatility to increase if it does, while the strong negative correlation between stocks and the dollar remains intact.
Stay tuned.
Let me know what you think. I love hearing from you!
And be sure to download this week’s Currency Report!
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