From the Desk of Ian Culley @IanCulley
The 2020 V-shaped recovery has warped investors’ brains.
But this is nothing more than recency bias. In reality, bottoms are a process, not an event.
Don’t fall victim to what’s easy or comfortable. Instead, let’s focus on the facts.
Markets continue to send mixed signals, testing the resolve of even the most disciplined investor. Rather than fight the trend or trendless nature of the markets, I prefer to identify evidence that supports the next directional move.
And there’s one insightful chart atop my deck regarding the direction of the US dollar.
Check out the triple pane chart of the Australian, the Canadian, and the New Zealand dollars:
To be fair, I guess it’s three charts, but I’ve managed to squeeze them together.
All three pairs have so far challenged their July pivot lows to varying degrees of success. The NZD holds above its respective lows while the AUD straddles its level, and the CAD retreats lower.
I don’t imagine a meaningful downtrend in the dollar materializes until these three commodity currencies get on the same page.
I want to witness expanding participation beyond the components of the US Dollar Index $DXY, and these risk-on currencies are at the top of my list.
It’s simple: The AUD, CAD, and NZD need to reclaim their summer pivot lows and trend higher, indicating broad dollar weakness.
In the meantime, my outlook for the US dollar doesn’t change.
As a technician, I can’t look at the DXY chart without acknowledging the break in the parabolic advance.
Regardless of the time frame, the trendline violation indicates a change in character, at the very least. And the lowest 14-day RSI reading in more than a year confirms the DXY rally has cooled.
Yes, RSI never reached oversold conditions. Nevertheless, the dollar index no longer holds within a bullish momentum regime in my eyes.
If I really wanted to lay it on thick, I could point out that the dollar hasn’t gone anywhere since May. But that’s deceiving – and it’s not the point of this analysis.
The parabolic US dollar advance is done. That’s a fact.
Could the dollar continue to rally from here?
Of course!
But I don’t want to make that bet below 115. Instead, I want to look for other currencies and risk assets to buy. Patience is required.
Remember, major turning points in the trend are a process. This process will consist of a series of smaller events – events much like the Australian, the Canadian, and the New Zealand dollars reclaiming their July pivot lows.
Focus on the facts. Remain disciplined. And stay tuned!
Thanks for reading.
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Allstarcharts Team
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