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.
With this in mind, let’s review some of our equal-weight currency indexes. These are an excellent illustration of the broad strength we’re seeing from USD lately.
We’ll also outline some levels we’re watching that investors can use as a roadmap in the weeks and months ahead.
Here is our G-10 Ex-Us Index which gives us a comprehensive view of how all the major developed currencies are faring relative to the dollar:
As you can see, they’re definitely not going up…
Just like what we’re seeing from many risk assets these days, our equal-weight index is rolling over after failing to reclaim a key level of overhead supply.
Last week, the index broke below its March pivot lows near 0.358 as it completed a double top formation. The bias is higher for US Dollars and lower for developed currencies in general as long as this pattern breakdown is valid.
Those March lows are a crucial level as the index is now sitting at fresh 7-month lows. This action jibes with all the evidence we’re seeing from individual pairs and supports our view that the US Dollar is undergoing a shift in its short and intermediate-term trends vs some of the most important currencies in the world.
But as mentioned, we’re not just seeing USD strength at the index level…
Many of the long USD trade setups that we laid out last month have either already broken out, are breaking out today, or are testing their respective risk levels and are likely to trigger an entry any day now.
Bottom line: There has been plenty of action at several important levels for some major USD crosses lately. Many have been violated in favor of the dollar in recent weeks, and we see no reason why this shouldn’t continue and pour over into other pairs.
Let’s recap...
The AUD/USD broke below the .7565 level in late June, completing a 6-month top.
Both the NZD/USD and GBP/USD have sliced through their respective breakout levels this morning.
And the EUR/USD is flirting with its support level near 1.1700 as we write this.
The fact that these trade ideas are working suggests this broad-based USD strength is likely to continue.
Now that we’ve covered developed markets, let’s talk about emerging currencies.
This is our equal-weight BRICS Currency Index:
* Note that unlike the G-10 Index above, USD is now in the numerator.
Therefore, when the price of this chart is trending higher it means that USD is outperforming this basket of some of the most critical emerging market currencies.
And that’s exactly what’s happening today.
Last month, we noted some very important information from this index as it printed a failed breakdown, or bear trap, as it undercut support at 19 before exploding higher in favor of the dollar.
Now that we’ve seen a sustained move higher, the next level to monitor is 20. If we take that out, the risk is most definitely to the upside as that would mark an upside resolution from this 14-month consolidation pattern.
Seeing USD continue to rally and break higher against these emerging currencies would be a major development in confirming the broad dollar strength we’ve been witnessing throughout the currency market this summer.
How we choose to take advantage of the developing USD strength is irrelevant.
It doesn’t matter if we trade these currency pairs or not.
The USD catching such a strong bid not only has wide-ranging implications on risk assets, but it also speaks to the increasingly risk-averse tone investors are taking on. We have to believe that risk continues to come off the table, and stocks and commodities remain under pressure if the USD continues to grind higher.
We’ve been raising cash for months as markets have been a complete and total mess. And for now, cash is still king -- the more, the better.
We want to tread lightly and stick to this script until we find ourselves in a more favorable environment for risk assets.
Until then... cash, bonds, and patience continue to be rewarded, so that continues to be our plan.
