Positioning For Lower Dollars

The question we're asking ourselves today is a big one.

Is the US Dollar breaking down from a multi-year consolidation?

With the dollar rangebound all year, we haven’t experienced a trending currency market. 

When the dollar is trending higher or lower, we have a good idea of the impact it is likely to have on other markets.

However, when it is trendless, the dollar is neither a headwind nor a tailwind for risk assets.

We think that could be changing.

Here's a weekly line chart showing the U.S. Dollar Index making new year-to-date lows:

As you can see, the US dollar bears have taken control and resolved this multi-year consolidation to the downside.

Here's another way to look at it.

The index is trading at the lower bounds of a well-tested range. Notice the flat 200-day moving average, illustrating the sideways nature of the primary trend.

And notice momentum, hitting its lowest level since 2020, confirming the new lows and overall bearish price action of late.

This look would suggest that the breakdown has not occurred yet. Bears need to drive DXY below this shelf of former lows before we have conviction the path of least resistance has shifted lower for dollars.

But the US Dollar Index doesn't tell the entire story. This is a weighted basket of developed market currencies against USD.

Let's have a look at how emerging market currencies are performing against the dollar.

We are seeing strength in emerging market currencies across the board (besides the Lira), adding to our conviction that the bears are in control of the dollar.

Think of this in the same way as weak market internals for USD.

Now here is a matrix of one-month returns for the major currency crosses:

While the Japanese yen has enjoyed a relentless bid, the dollar has weakened versus every major currency over the past month.

A weaker dollar could be incredibly constructive for risk assets. We would expect stocks to trend well in this kind of environment.

But for this post, let's focus on how we can take advantage of it in the forex market.

In July, we outlined a bullish trade idea for the Canadian Dollar if it was above .7355.

Today, the loonie is bouncing off a major level of support and triggering an entry:

In the chart above, the lower panel shows commercial hedgers in green and large speculators in red.

Commercials have never owned this many Canadian dollars in history. This is as extreme as extreme positioning gets.

We want to buy CAD/USD on strength above .7355, with a target of .76.

As for what this action in the dollar means for other markets, USD weakness should continue to drive an improving landscape for global liquidity.

This is the type of environment where stocks and other risk assets thrive.

We'll be sure to follow up once we have a confirmed DXY breakdown in the books.

-Allstarcharts Team

Thanks for reading.

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