From the Desk of Ian Culley @IanCulley

Markets are bracing for tomorrow’s FOMC decision – including the dollar.

That’s right – we have more indecisive action on tap. Let’s call it the knee-jerk before the knee-jerk, with a little help from today’s May CPI print. 

Interest rates, the US Dollar Index $DXY, and gold have yet to make a decisive directional move.

To be fair, most markets are trading within their respective year-to-date ranges (except the S&P 500 and Nasdaq 100, of course).

But if we turn to emerging market currencies, we don’t see any sign of hesitation…

Check out our EM Commodity Currency Index (equally weighting the Mexican peso, the Brazilian real, the Chilean peso, and the South African rand) posting new 52-week highs after violating a long-term downtrend line at the beginning of the year:

From the Desk of Ian Culley @IanCulley

Petrocurrencies and crude oil futures are diverging.

The currencies that benefit most from higher oil prices refuse to roll with crude’s steady decline. 

Perhaps it’s more about the US dollar than a handful of currencies tied to oil’s supply and demand dynamic.

But with OPEC up to its old tricks again – Saudi Arabia announced deeper production cuts last weekend – the question arises…

Is crude oil due for a bounce?

Check out the overlay chart of our petrocurrency index and crude oil futures:

Crude oil posted a key pivot high a week after our index bottomed in late September. Since then, these markets have taken separate paths.

From the Desk of Ian Culley @IanCulley

"Buy stocks if the US Dollar Index $DXY trades below 105!"

Simple and straightforward. That was our roadmap back in early March.

Now, almost three months later, the dollar is putting that strategy to the test as it approaches 105 from below.

That multi-month consolidation with “continuation pattern” written all over it never continued lower.

Instead, the dollar index has chopped sideways within a tight range for almost six months. And the evidence is beginning to support a possible upside resolution…

The lack of broad US dollar weakness caught my attention back in April. 

Our G-10 currency index and US dollar advance-decline line were printing potential higher lows, while DXY was on the verge of undercutting pivot lows from earlier in the year. The divergence suggested burgeoning USD strength.

Interestingly, DXY has gained roughly 3.5% since.

From the Desk of Ian Culley @IanCulley

Here we go again… 

The USD/JPY is breaking out.

I can’t think of a stronger trend than the dollar-yen last year. It absolutely ripped to the point we were joking everything priced in yen looked good – even gold!

But it wasn’t the only market trending higher at the time. The US dollar and interest rates also rallied together.

Today’s USD/JPY strength raises a painful question for many investors…

Will interest rates and the US Dollar Index $DXY follow?

Before we delve into the broader implications of a USD/JPY rally, let’s outline the setup for those who trade forex markets.

Check out the dollar-yen reaching its highest level since November 2022, completing a six-month consolidation:

From the Desk of Ian Culley @IanCulley

Dollar up… 

Everything else? 

Down.

Last Friday’s action sent flashbacks of 2022 across my screen.

It was all King Dollar last week as risk assets and bonds sold off in tandem.

But before we all get carried away talking about the next leg higher for the dollar, let’s zoom out to get a read on where the DXY truly stands…

In the middle of a short-term range.

The US Dollar Index $DXY finished last Friday, posting its best week since peaking in late September 2022.

But it’s been stuck between 105 and 101 since December:

The DXY might have gained 1.5% last week, but it’s stuck below a key retracement level. It’s a range-bound mess like much of the market despite the recent bout of strength. 

Sideways is the trend.

From the Desk of Ian Culley @IanCulley

Dollar bulls hold the line.

The US Dollar Index $DXY is clinging to the 100 level, refusing to let go despite new 52-week highs for the British pound and a steady rise in the euro.

I’ve laid out numerous ways to play the dollar in recent months and what will confirm a DXY breakdown. None of that has changed.

But one chart caught my eye.

I was struck over the weekend by the resemblance between the commercial position in gold and DXY.

Check it out…

DXY sits up top with the commercial or smart money position in gold in the lower pane:

From the Desk of Ian Culley @IanCulley

"The bigger the base, the higher in space."

That’s how I learned it from JC.

But he wasn’t the technician who coined the adage. It was actually handed down from Lousie Yamada, who studied under the legendary Alan Shaw.

It was amazing to connect with technicians from around the world last week at the 50th Annual CMTA Symposium.

I have a great deal of gratitude for all those who made last week possible and to the founding members who paved the way for technical analysis. 

The experience was humbling, as it exposed my roots and reminded me where I come from.

It's just like the Swiss franc reminds us that observations from more than a hundred years ago continue to play out across today’s markets…

Check out the monster base in Swiss franc futures:

From the Desk of Ian Culley @IanCulley

"Rates, the US dollar, crude oil, and the S&P 500... repeat!"

These charts swirl atop every investor’s mind as markets await the upcoming rate hike decision.

Meanwhile, it’s messy!

The S&P 500 challenges the upper bounds of a multi-month range. The US dollar and interest rates chop sideways. And crude oil remains resilient despite increased selling pressure.

But not all markets are trapped in a trading range right now. In fact, there’s one forex cross breaking down, suggesting lower yields and cheaper crude oil…

It's the nokkie-stocky, the Norwegian krone and the Swedish krone!

Check out the triple-pane chart of the US 1o-year yield, crude oil futures, and the NOK/SEK cross:

From the Desk of Ian Culley @IanCulley

A weaker dollar remains a key ingredient for a risk-on rally. Yet, like interest rates, the buck refuses to roll over.

The US Dollar Index $DXY continues to hover well below last year’s peak, holding within a tight range for the past four months.

Today, we’ll review critical levels for DXY as this trendless action defines the chart.

We’ll also look beneath the surface for signs of broad strength or weakness and revisit a binding intermarket relationship for clues regarding the dollar’s next major move.

First, let’s define the critical boundaries of DXY’s multi-month range:

The 105 level has proven a significant area of resistance. 

On the flip side, the February pivot lows at approximately 101 mark the lower boundary of the year-to-date range. That’s where we find DXY today.

From the Desk of Ian Culley @IanCulley

Trendless price action remains the way right now for currency markets.

Yes, some of our bearish dollar trades have triggered and are trending. But most have not. 

It doesn’t mean they won’t, of course. But it would be irresponsible not to consider potential outcomes that conflict with my bearish USD thesis…

If the dollar rips, what USD dollar pair would I use to express a bullish outlook?

The answer: the South African rand.

Check out the weekly chart of the USD/ZAR pair:

The dollar has been in a strong uptrend versus the rand for more than a decade. It’s been one base breakout after another, leading to the USD/ZAR challenging its all-time highs last month. 

From the Desk of Ian Culley @IanCulley

The US Dollar Index $DXY is dropping – and our bearish USD trade ideas are beginning to trigger.

While I tend to stick to major developed-market (DM) currencies for placing trades, I still monitor the less liquid forex pairs for information. 

I want to see DM currency strength spill over into emerging-market (EM) currencies, confirming the broadening US dollar weakness. 

As always, I strive to break it down to one level, one chart, whenever possible. 

This next chart does the job…

Here’s the WisdomTree Emerging Currency Fund ETF $CEW:

From the Desk of Ian Culley @IanCulley

Commercial hedgers are taking an interest in the Canadian dollar. 

The CFTC has finally updated its records after the recent data breach.

And, as expected, we have some extreme positioning on our hands…

Check out the chart of Canadian dollar futures with the Commitment of Traders Report (COT) in the lower pane (red line for commercials, black for large speculators, and gray for small speculators):

Commercials hold their largest net-long position since early 2019. Extreme positioning such as this tends to mark key inflection points.

Why?

Because commercial hedgers represent the largest short sellers for any given market. And strong hands move markets.