From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Despite the rising US Dollar Index, strength among commodity-centric currencies has been a key theme for much of this year.
Today, that’s no longer the case.
The rally in the USD is accelerating, as dollar strength broadens to even the most resilient currencies.
Two of the top commodity currencies – the Australian and Canadian dollars – are undercutting the lower bounds of their current ranges and making fresh 52-week lows.
These breakdowns mean the path of least resistance is now lower. If these are valid resolutions, we’re looking at increased headwinds for risk assets.
Let’s look at a couple charts of the AUD and the CAD, highlight the levels we’re watching, and discuss what continued weakness in these major currencies means for stocks and commodities.
First up is the Australian dollar-US dollar cross:
The aussie is in the process of completing a major top as it loses a critical support level around 0.6965.
It’s tested this level numerous times during the past sixteen months. A decisive breakdown below those former lows carries a bearish outlook.
As long as the AUD/USD pair is below that area of former support, we like it short with a downside target around 0.6000. This would put us back near the COVID lows.
The Canadian dollar is another crucial commodity-centric currency that’s been sliding.
Here’s a daily chart of Canadian dollar futures carving out a multi-month topping formation:
After multiple tests of support near 0.7720 since last year, the CAD is breaking down to fresh 52-week lows this week.
We want to short Canadian dollar futures as long as we’re below this broken support zone with a measured move target of 0.7050.
In the forex market, the USD is in the numerator of the cross, so it’s just the inverse of the futures contract.
Here’s a chart of the USD/CAD pair:
Instead of a topping pattern, the USD/CAD is resolving higher from a textbook bottoming formation.
We want to get long this forex cross if and only if it’s above the pivot highs from last December around 1.2965. As long as it’s above there, we’re targeting 1.3550.
We’ve been short the euro, the pound, and the yen for weeks. Now we want to start selling major commodity currencies such as the Australian and Canadian dollars too.
But what does this mean for the broader market beyond fresh sell signals in a couple forex pairs?
If more and more global currencies break down against the USD, it’s only a matter of time until dollar strength produces stiff headwinds for risk assets.
And these aren’t just any currencies making new lows, these are “commodity currencies.” There’s a reason we call them that… they have a very strong correlation with commodities themselves.
This chart of the CAD and copper illustrates this point well:
New lows in the CAD don’t bode well for copper or commodities at large. We could sub in AUD and this chart wouldn’t look any different.
The point is that seeing these currencies break down suggests more selling pressure is in store for commodities.
If the dollar continues to rally, it’s only a matter of time until it weighs heavily on the commodity rally. The entire complex has remained resilient in the face of a rising dollar until now, but we can’t expect that to last.
If new downtrends materialize in the AUD and the CAD, it’s just a matter of time before commodities finally feel the pressure.
We’re already seeing signs of pain as commodities correct across the board and natural resource and commodity-related stocks come under increased selling pressure.
If these downside resolutions in the AUD and the CAD are the real deal, we’re anticipating more of this price action in the future.
We’ll keep you updated as these developments unfold. Stay tuned!
Thanks for reading!
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