From the desk of Tom Bruni @BruniCharting
I know the US Dollar isn’t as sexy as Tesla’s Elon Musk tweeting market moving information every few hours or Apple hitting a trillion dollar market-cap, but I have been waiting all summer for a resolution of this range in the Dollar Index and it looks like we might be finally getting it. Whether this move is successful and the Dollar continues higher, or it’s a failed breakout that sends the Euro ripping, there will be significant cross-asset implications that are worth thinking about as this move develops.
First, let’s start off with a daily chart of the US Dollar Index. In late April, prices broke above the downtrend line from its March 2017 peak and rallied toward its October highs where prices stalled. For the last two months prices have consolidated within an ascending triangle of higher lows and many failed attempts to clear the October highs. This gave momentum plenty of time to work off its bearish divergence and for the 200-day moving average to flatten out and begin rising ever so slightly. All of these characteristics are what you’d expect to see during a consolidation period that ultimately resolves higher, but now price is finally confirming it.
Click on chart to enlarge view.
From a quantitative sentiment perspective there’s some excess optimism in the options market, but not nearly as much as we saw at the 2014 or 2016 highs and commercial hedger positioning, while short, is not at an extreme either. From a qualitative perspective I’ve not read, or spoken to many people with, the view that the Euro is going higher from current levels, so that’s an interesting tidbit.
Nonetheless, let’s look at the Dollar Index’s largest component, the Euro.
Below is a daily chart of EURUSD which is very much a mirror image of the Dollar Index. Prices broke down from their highs in late April, quickly falling toward former support / resistance and have been consolidating in a descending triangle of lower highs and unsuccessful breaks of 115.40. Momentum remains in a bearish range and the 200-day moving average has flattened and is beginning to roll over. Now prices are finally confirming what these characteristics were suggesting, a continuation lower, by closing at 1-year lows.
From a quantitative sentiment perspective, neither options positioning nor commercial hedger positioning are near extremes, suggesting there’s more room to go to the downside in the Euro.
Regardless of the outcome, this move is going to have a lot of important implications for Commodities (specifically metals), Global Equity Markets (especially those owned through ETFs with local currency exposure), and other assets around the world.
While sentiment isn’t necessarily stretched to extremes in the US Dollar and Euro themselves, where we are starting to see some multi-year extremes in options and commercial hedger positioning is in Precious Metals. A confirmed failed breakdown and bullish momentum divergence in something like Gold or Platinum that’s been beaten up all year can ignite a counter-trend rally that’s exacerbated by the negative sentiment.
I know it’s a summer Friday so I won’t make this an extremely long post talking about all the relationships and possible outcomes, but my point is I’m watching the Dollar Index to see if it can close this week strong and will certainly be thinking about how it’s going to affect trends in other markets as I do my homework this weekend. I know many of you will be too.
As always, thanks for reading!