From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

The US Dollar has been trapped in a sideways trading range for the trailing 12 months now. The primary trend is lower, and we continue to see near-term weakness from the DXY Index as well as most USD crosses.

Commodity-centric currencies have been some of the best performers versus the Dollar since early last year, although most of them have been correcting since Q1 or Q2, giving back a good deal of their earlier gains.

So, will we see a resurgence back to those risk-on pairs, or will they keep sliding lower against the Dollar?

Today, we’re going to focus specifically on the currencies of some of the largest oil-producing countries in the world.

This should give us information not just about currency markets, but also commodities and risk assets in general. 

Let’s talk about it.

An easy way to aggregate and measure their performance as a group is by analyzing our Petrocurrency Index. It includes currencies like the Canadian Dollar $CAD, the Russian Ruble $RUB, and the Brazilian Real $BRL, among others.

Here it is, overlaid with Crude Oil...

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

In last week’s Currency Report, we highlighted the NZD/USD cross as a means to express our bearish US dollar thesis.

The setup was too good to resist taking a swing at following the recently failed breakdown. And so far, we’ve been rewarded for it. That’s information.

But it’s not the only cross that continues to trend well against the US Dollar. We see it all over, and it’s only reinforcing our bearish thesis.

As such, we want to look for more opportunities to take advantage of this developing theme.

In this week’s post, we’re going to do just that.

Let’s drill into our forex universe now and identify some of our favorite risk/reward setups we want to bet on to capture profits from a weakening US dollar. 

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

Two months ago, we laid out plans to position ourselves for a push higher in the USD.

Of the four trade setups we identified--EUR/USD, GBP/USD, AUD/USD, and NZD/USD--the Aussie was the only one that worked. 

The fact that many of those trades failed or, more specifically, were never even triggered at all, is information!

Fast forward to today and we're looking at a failed breakout in the US Dollar Index that's been confirmed by strong downside follow-through since last week. Now, it’s time to flip the book long on some of these trades to express our thesis of further USD weakness, at least over the near term.

One trade setup that stands out due to its asymmetric risk-reward profile at current levels is the NZD/USD.

Let’s take a look at the Kiwi...

Here’s the daily chart of the NZD/USD cross:

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From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

The market has been a choppy mess for months. 

Unless you’ve been stuck under a rock or at the beach all summer, this is old news. And we’ve admittedly been a bit obnoxious when it comes to rehashing this theme. But usually when we find ourselves harping on something, it's because it's a big deal.

Our own behavior can be fantastic information, and it's become a part of our process to pay special attention whenever we begin to repeat ourselves a lot.

This week is no different, as the US Dollar Index $DXY provides another example of the market’s sloppy state of affairs.

Just when we thought we might finally have some decisive price action in the Dollar, Friday’s attempted breakout followed by Monday’s weakness is casting some serious doubts.

Was last week’s breakout above the March pivot highs valid?

Or was it just another failed move to add to the market’s growing list of whipsaws and fake-outs?

Let’s take a closer look at the US Dollar Index to...

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

The US Dollar Index $DXY has been our main focus as it nears the upper boundary of its recent range.

Where the USD heads next will have wide-ranging implications across asset classes by either providing a tailwind for risk assets or a headwind in the case it resolves higher from its year-to-date range.

But, as the market continues to chop sideways, we want to direct our attention to one of the most important risk gauges in the currency market.

That’s the Aussie-Yen.

In this week’s post, let’s check in on the AUD/JPY to see what information we can glean regarding risk appetite and what it could mean for other markets.

Let’s dive in.

First, we have a daily chart of the AUD/JPY:

Two key elements stand out on the daily chart. First, there’s the recent distribution phase, which we can see in the shape of a frowny face. This topping pattern resolved...

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

The US Dollar Index $DXY has been a good reminder that price doesn’t always move in a straight line. 

Paul Tudor Jones has been quoted saying “markets only trend about 15% of the time.” The textbooks will tell you it’s somewhere between 20% and 30%. But it all comes down to how you’re measuring it.

We think it’s fair to say most markets trend about 25% of the time on a structural basis.

And the present year two market conditions have been a great illustration of what they look like the other 75% of the time… range-bound... sideways... a hot mess.

Speaking of which, last week, we pointed out that Dollar strength had stalled and that things were beginning to look messy on shorter time frames. 

Many of the long USD trade setups we laid out in late June have yet to break out and are currently testing their...

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Was that it for the recent bounce in the US dollar?

A little more than a month ago, we began to see broad-based strength in USD emerge on both a short and intermediate-term basis. 

Since then, it’s been the central theme in currency markets. 

But we're starting to see signs that this near-term US dollar dominance could be fading as bulls have had ample opportunity to push the USD higher in recent months but have made little progress. 

The lack of follow-through can be seen in our long USD trade ideas from late June, as most are not working. We recently saw many crosses reach our risk level, but price rebounded instead of triggering an entry. The EUR/USD is a great example of this. 

One exception is...

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

The current market environment demands that we adhere to our risk management protocols as strictly as ever.

It’s a mess out there!

And with each passing day, more and more signs point to these challenging conditions persisting.

There is one data point in particular that we believe is likely to remain a serious headwind for risk assets: continued strength from the US Dollar.

We’ve covered this theme in detail the past couple of months as USD has rebounded against just about every major currency we track.

As always, we will continue to monitor the dollar as it is a vital piece to the intermarket puzzle.

Put simply, when investors are seeking safety in the dollar, it’s usually happening in an environment where stocks are under pressure.

Last week, we highlighted the violation of a key pivot low in our...

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

What started out as a tactical bounce in the US Dollar could be turning into a full-fledged reversal of the primary trend.

Defensive assets such as US Treasury bonds and the Japanese yen are catching a bid. On the other hand, risk assets continue to struggle at overhead supply. Many are experiencing significant selling pressure at these logical levels.

With each passing day, the choppy environment that’s been in place since early February is becoming increasingly messy. 

This is a perfect environment for the US dollar to thrive as more and more investors are hiding out in safe-haven assets and waiting for the smoke to clear.

...

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

As risk comes off the table in this messy market, we want to continue to look for opportunities to bet on the US Dollar.

Bonds are catching a bid. Procyclical commodities are consolidating below overhead supply. The AUD/JPY is rolling over. The Yen is strengthening. And of course, King Dollar has begun to reassert its dominance. 

Consider all this defensive posturing within the context of the choppy year-two environment we're in, and it appears investors are really beginning to seek shelter from the storm.

And what’s one of the most popular safe-haven assets?  

The USD.

We’ve already laid out...

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

As US Dollar strength unfolds and US treasuries continue to catch a bid, it’s no wonder our motto around here has been bonds, cash, champagne.

It’s been working, and it continues to work!

We’ve been downright obnoxious about our tactical view of the US Dollar over the past month.

A potential bounce was developing, strength emerged, and we pointed out numerous crosses in which the dollar was poised for a push higher.

The market environment directed our focal point toward the Dollar. And now that it appears risk is coming off the table, we’re shifting our focus to the Yen.

Usually, when we talk about risk-on/risk-off behavior and the Yen, the...

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

We’ve been pounding the table about the broad-based strength from the US Dollar since earlier this month. Due to the momentum of its recent move, we believe this rally could have legs beyond just the near-term... But we'll address that when the time comes.

For now, we're positioned to take advantage of this swift rebound from the Dollar through a handful of USD crosses currently offering favorable risk/rewards. 

Though the Dollar gave some of this month's gains back last week, our short-term outlook remains higher. As I write this, many G-10 currencies like the Euro, Pound, Aussie, and Canadian Dollar are all rolling over relative to USD. 

We’ll be revisiting this theme plenty as it plays out over the coming weeks to months.

But in the meantime let’s focus on a currency pair that’s bucking the trend, the US Dollar-Brazilian Real $USD/$BRL.

Here’s a weekly bar chart of USD/BRL...