USD Testing Critical Levels

Several areas of the market have reached key levels of support or resistance. 

Crude Oil continues to digest recent gains just below overhead supply near its former 2019 highs. 

The Euro/Dollar is finding support at the recently violated 12-year downtrend line. 

And the Emerging Markets ETF $EEM continues to consolidate near its 2007 highs.

Meanwhile, the US Dollar is also testing key levels. 

USD strength has become a major market theme over the last couple of months -- along with the potential effects it could have on global risk assets. A strong US Dollar could apply pressure to Emerging Markets, Commodities, and cyclical assets in general. This would challenge the global growth thesis and the rotation into cyclical areas we have seen play out over recent months.

On the flip side, there are areas of the Currency Market that continue to support the global growth narrative. 

Last week, we pointed out the resiliency of commodity-centric currencies in the current market environment, highlighting the Canadian and Aussie Dollars. 

This week, let's take a closer look at another risk-on currency pair as it approaches an inflection point.

Here’s South African Rand USD/ZAR:

USD/ZAR is testing a confluence of support levels. Price is beginning to break below a 9-year trend line as it approaches a key level of former support near 14.21.

Many of us might not trade this Forex cross. But in what kind of environment would the US Dollar break down against the South African Rand?

One potential answer: An environment where risk-assets around the world are catching a bid and broad USD strength wanes.

Notice how USD/ZAR peaked in early 2016, when risk assets bottomed out. Then USD/ZAR bottomed in early 2018 when risk assets peaked. And then like many Dollar crosses, USD/ZAR peaked last Spring, when risk assets bottomed across the board. Further weakness in this cross makes sense in a market with a bid in risk assets.

USD/ZAR is just one example of the US Dollar nearing a key level. In fact, several currency pairs are approaching potential inflection points that could provide insight into the intermarket picture.

We take a closer look at these relationships in the full ASC Currencies report, available below for Premium Members, along with our updated Currency Workbook.

Thanks for reading and please let us know if you have any questions!