From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The turmoil in equity markets has stolen all the attention since last year. But stocks aren't the only asset class that's a mess. We're getting the same kind of mixed signals and sloppy price action from forex markets.
While stocks remain under pressure, currencies have been throwing head fakes and dishing out whipsaws all year long. The AUD/USD broke to fresh nine-month highs just last week only to reverse 200 pips by Friday’s close.
We're seeing this type of action from currencies all over the world. It’s hard to trust a breakout these days. As frustrating as these failed moves may be, there are some clean chart patterns and favorable setups shaping up right now.
One area where the trend is very clear is the Japanese yen. Just about anything priced in Yen has been rallying recently as the currency continues to collapse.
Today, we’re going to highlight the massive base in the USD/JPY.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
King dollar is sitting perched upon its throne. But the floor beneath it is beginning to crumble.
The rally in the US dollar index $DXY isn’t as strong as today's fresh highs would suggest. In fact, when we dig beneath the surface, the dollar is only trending higher against a few currencies over shorter timeframes, while underperforming the vast majority.
Conveniently, the handful of currencies the USD continues to best are the most heavily weighted components of the US dollar index.
This lack of internal strength can be seen pretty much anywhere outside of the chart of DXY itself. Whether we're looking at our USD trend summary table, our custom USD advance-decline line, or the individual crosses themselves, it all suggests the current trend in the dollar lacks support.
Let’s take a look.
Our USD trend summary table illustrates both the broad weakness as well as those critical areas of strength that are driving the current uptrend in the DXY:
Over the past half-decade or so, we've seen the US Dollar Index maintain a very high negative correlation with risk assets.
When stocks are doing well, the Dollar has normally been under pressure. And when stocks have struggled, as most of them have over the past year, the US Dollar has kept a bid.
Look how poorly the Dollar did when stocks ripped in 2020 off those pandemic lows. And then look at the strength in the Dollar over the last year as most stocks have struggled:
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Rates continue to move higher around the world as central banks do their best to combat inflation.
As investors, our best course of action is to position ourselves in those areas that benefit most from rising rates.
Commodities and cyclical stocks immediately come to mind. But there are also specific currencies that tend to excel in rising rate environments.
Today, we'll discuss a handful of emerging-market currencies with heavy commodity exposure.
We’ve been waiting on these currencies to catch higher and confirm the price action in commodities since last year… and it looks like it’s finally happening.
Let’s dive in.
First up is an overlay chart of the US 10-year yield and our equal-weight basket of EM commodity currencies:
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The unwind is on in the aussie!
After accumulating a historic net-long position last fall, commercial hedgers are scrambling to cover. Over the past four weeks, the smart money has trimmed its long exposure to roughly half of what it was.
This is reflected in our most recent Commitment of Traders Heatmap, which you can view here.
When positioning flips at extremes – like we’re seeing now in the Australian dollar – we want to look for opportunities to ride the emerging trend. In other words, we want to bet in the direction that commercial hedgers are currently unwinding away from.
In the case of AUD, they recently had a historic net long position. As such, we’re looking for bullish technical characteristics to see if a long setup makes sense here.
It just so happens that things are really coming together for the aussie chart lately. We love when technicals and sentiment line up like this.
High Beta vs. Low Volatility, Copper vs. Gold, and our custom Risk-On vs. Risk-Off ratio have all gone nowhere since the beginning of 2021.
The Australian dollar/Japanese yen also falls into the range-bound category, as the risk-on pair looks a lot like the ratios we just mentioned.
But AUD/JPY has been showing resilience the past few weeks and is currently challenging the upper bounds of its multi-month range.
Since most risk appetite indicators aren’t giving us much in the form of new information these days, an upside resolution from AUD/JPY would be a major development.
It hasn’t happened yet, but things are certainly setting up that way.
In today’s post, we’ll dive into one of our favorite risk-on/risk-off gauges – the AUD/JPY cross - and discuss what it’s currently suggesting about risk-seeking behavior.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
US dollar strength is broadening as global currencies lose critical levels against it.
Last week, we outlined crucial support levels in the EUR/USD pair. Those levels have since given way, as sellers have taken control of this major forex cross.
Today, we’re going to highlight two other USD pairs that recently sliced through key levels, further paving a path of least resistance that favors the US dollar.
First up is the British pound, GBP/USD:
The pound has been carving out a distribution pattern for the past year.
