From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The US dollar is front and center as risk assets hang in the balance.
Earlier in the month, we placed the Australian and Canadian dollars on breakdown alert as they completed major topping patterns.
US dollar strength was expanding at the time, and the AUD and CAD were the last dominos to fall.
Or so it seemed.
What started as strong downside resolutions for these top commodity currencies quickly turned into potential failed breakdowns.
Now that the most resilient currencies are snapping back against King Dollar, it's compromising the broad US dollar rally and could usher in a more favorable environment for risk assets.
Let’s discuss what it means for stocks and commodities if these failed breakdowns resolve higher.
Here’s a chart highlighting the recent action in the Canadian dollar and Australian dollar futures:
We retired our "Five Bull Market Barometers" in 2020 to make room for a new weekly post that's focused on the three most important charts for the week ahead.
This is that post, so let's jump into this week's edition.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Copper is challenging the lower bounds of its range.
The AUD/JPY is attempting to reclaim former support.
And the S&P 500 is digging in at the AVWAP from its COVID lows.
These are some of the most important charts and levels in the market right now.
But there’s one chart that tops them all…
In our view, the US Dollar Index $DXY is the key to this market.
It’s currently struggling to resolve higher from a multi-year base after reaching its highest level since 2002.
The breakout could stick and lead to a sustained uptrend. Or, it might fail. Either way, the outcome will have wide-ranging impacts on risk assets.
If the breakout from this multi-year double bottom is a valid one and the dollar continues to trend higher, we’ll continue to see downside pressure for the majority of risk assets.
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:
As we progress into Q1 of Fiscal Year 2022-2023, this playbook outlines our thoughts on every asset class and our plan to profit.
This playbook will cover our macro view, touching on Equities, Commodities, Currencies, and Rates, as well as outline our views on the major nifty indices and the sector/thematic indices.
We also cover individual stocks we want to be buying to take advantage of the themes discussed in the playbook.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
While most uptrends have come under pressure in 2022, the US dollar has remained as strong as any.
This dollar strength, particularly at the index level, is nothing new. We've been discussing it.
It's been taking place all year, driven by the major pairs such as the euro, the yen, and the pound.
However, something new is the burgeoning strength beneath the surface, even outside of the big developed market currencies. We've been seeing dollar internals improve drastically in recent weeks.
And now we're seeing momentum accelerate for the US Dollar Index $DXY. Today, DXY is on track for its largest single-day gain since the pandemic crash more than two years ago.
All of the evidence suggests this dollar strength is the real deal.
Let's talk about what it means and how we want to position for it.
Here's the US Dollar Index ripping to its highest level in almost 20 years:
While the dollar pressed to new highs against the yen, the pound, and the euro, it struggled to gain ground against commodity-centric and emerging market currencies.
The lack of broad strength had us questioning the validity of the recent rally in the US Dollar Index $DXY.
That’s changed recently.
Today, the dollar index is catching to new highs against a backdrop of broadening strength, not weakness. Now that we’re seeing dollar internals flip and start to confirm these new highs from the index, this is not a trend we want to fight.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The US Dollar Index $DXY resumes its relentless march higher.
But the full story surrounding the dollar’s dominance is a bit more complicated.
Lately, we’ve been pounding the table about the narrow scope of the DXY, as 83% of its weightings come from just three currencies – the yen, the pound, and the euro.
All three continue to lose ground versus the dollar, and this is exactly what's driving the rally at the index level.
While this remains the case, we’re starting to see USD strength expand beyond the major components of the DXY. We're also seeing some nice long-term patterns materialize that favor the US dollar.
A great example is the rounding bottom in the US dollar-Korean won cross – USD/KRW.
