Betting on a Weaker Won

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

The US Dollar Index $DXY resumes its relentless march higher.

But the full story surrounding the dollar’s dominance is a bit more complicated.

Lately, we’ve been pounding the table about the narrow scope of the DXY, as 83% of its weightings come from just three currencies – the yen, the pound, and the euro.

All three continue to lose ground versus the dollar, and this is exactly what's driving the rally at the index level.

On the other hand, the USD has not performed as well against other currencies – especially emerging markets and commodity-centric ones. 

While this remains the case, we’re starting to see USD strength expand beyond the major components of the DXY. We're also seeing some nice long-term patterns materialize that favor the US dollar.

A great example is the rounding bottom in the US dollar-Korean won cross – USD/KRW.

Here’s a zoomed out weekly chart of the USD/KRW pair:

The USD/KRW is in the process of completing a decade-long reversal pattern. This might not be the cleanest base, but after a decade of accumulation it should work as well as any.

USD/KRW recently broke to fresh multi-year highs, reclaiming a critical level around 1,215. The price action around this level has been messy during the past decade, but it still represents an area of overwhelming overhead supply.

We want to take a shot on the long side of the USD/KRW pair now that the bulls have reclaimed this key level. 

As long as it’s above 1,215, we want to be long with a target around 1,350. We're flat on any break below that crucial level of former resistance as we only want to be involved if this is a valid base breakout.

So what does it mean from a broader market perspective if the dollar starts to rip higher against the won? 

Aside from being a stellar trade, this is also a significant risk-off development.

If we see upside follow-through in the coming weeks, we have to imagine other currencies outside the dollar index are also coming under pressure. In that environment, equities and other risk assets could experience heightened volatility as well. 

That’s something every investor needs to keep in mind – regardless of whether we trade the forex markets or not.

We’ll be sure to keep you posted. Stay tuned!

As always, let us know what you think.

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