From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
Is the US Dollar Index $DXY on the brink of completing a massive reversal pattern to the downside?
As more evidence comes into the picture, it's looking increasingly dire for the dollar. In fact, we're seeing it trend loweracross all timeframes against almost all of its peers.
And this action has only gained steam over the last week as DXY has plunged to fresh multi-month lows.
Dollar weakness has been a nice tailwind for risk assets since its peak in March of last year. Any additional downside pressure in the coming weeks, months, and even quarters would not surprise us... especially if this daunting double-top pattern breaks lower. If and when this happens, further weakness from both a tactical and structural standpoint is exactly the bet we'll be making.
Let's dig deeper and look at what actually drives the DXY. By looking at the various crosses that make up the index, we gain insight in terms of building a directional bias for DXY. This process also provides a weight of the evidence framework we can use to build a much bigger picture view of the greenback and its overall health.
There is certainly no shortage of examples (and we've written about plenty of late) but the US Dollar / Canadian Dollar cross does about as good a job of any chart when it comes to illustrating USD weakness.
Here's a look at the chart with about a decade of price history:
This sure looks more like a frown than a smiley face, wouldn't you agree?
JC had Paul Ciana on Technical Analysis radio this week to chop it up about all things currency land, and he pointed out the classic double top developing in the USD/CAD cross. Price is literally hanging out pennies above the breakdown level of about 1.20 as we write this.
A decisive close below this level would set our near-term target at 1.14 along with a longer-term objective of 1.07.
More importantly, a breakdown below this crucial level and a valid execution of this massive bearish reversal formation would support the risk-on and reflationary themes that we've been pounding the table on since last year. You know... stuff like us being in the early stages of new bull markets for Commodities and stocks around the world? Now, that's the information that matters. And certain commodity-centric currencies like the CAD and Aussie Dollar are excellent barometers for risk-appetite and thus give us some great signals about the health of other asset classes.
Right now, they're both saying all signals GO. On Monday our favorite FX risk gauge of all - the Aussie/Yen ($AUD/$JPY), broke out to its highest level in over three years.
As we mentioned, by isolating the Dollar and examining its price behavior one currency at a time - we can develop a clearer view in terms of the weight of the evidence. Simply put, as more and more consolidations resolve in one direction, the more likely other pairs are to follow.
In the current environment, we're seeing the USD make fresh multi-month or even multi-year lows vs its G-10 peers. We think a breakdown in the USD/CAD could be a leading tell for where other USD crosses are headed from here.
The broad weakness in king dollar is becoming more and more clear as we gradually see the trend turn against it across all timeframes and against more and more developed currencies. Here is a look at our US Dollar Trend Summary where we're measuring the USD against 15 other key currencies around the world:
Notice all the green. That's not a good sign for DXY. And we're seeing this pervasive weakness align itself across all timeframes. The picture couldn't be more clear.
100% of the currencies in our FX universe have a bullish short-term reading -- while just about every single FX pair, except for the safe-haven Yen,have bullish trend readings over the short-term, intermediate-term, and long-term timeframes!
So this table also shows a heavy risk-on tilt, evidenced by the Dollar only being able to hold up against the Yen, while it trends lower against just about everything else, particularly risk-on currencies.
We have no reason to believe this potential half-decade double top in the DXY doesn't break to the downside:
And it probably happens sooner than later. We think the USD/CAD should give us a great heads up.
If and when it happens, we're watching the breakdown level near the 2017/18 lows at 88.50 with objectives of 83.50 and 76.50.
Remember, risk assets peaked around the world in early 2018. DXY breaking below those former lows would be a significant development for global risk assets.
We have to imagine we are in an environment that rewards us for buying stocks and commodities if this double top is completed and the Dollar Index is trading below those former 2018 lows.
For now, the weight of the evidence strongly suggests this is where things are headed.
