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.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Currency markets are reacting to the war that’s broken out in Europe.
In the past four trading sessions, the Russian ruble has dropped more than 1,000 pips against the US dollar.
And, with fear growing that these initial days of fighting will turn into a protracted conflict, weakness is striking the euro as well.
Let’s take a look at the EUR/USD cross and outline the levels we’re monitoring in the coming weeks and months.
Here's a daily chart of the EUR/USD going back to the pandemic lows:
After completing a large distribution pattern last September, the EUR/USD pair has been consolidating for the past several months and trading in a range between 1.1483 and 1.1121.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Despite the trendless nature of the major forex pairs, there’s still plenty of information coming from the exotics right now – particularly emerging market currencies.
The Chilean peso – and its relationship to copper – now has our attention.
Let’s take a look.
Here’s a chart of the USD/CLP cross overlaid with Copper Futures $HG_F with a correlation study in the lower pane:
Chile is the world’s largest copper producer, which explains the strong negative correlation between the USD/CLP pair and the price of copper.
You can see this relationship in the chart, as USD/CLP tends to peak and roll over at the same time copper bottoms out, and vice versa.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Consolidation and range-bound action have dominated the currency market since late last year.
While commodities and cyclical stocks -- especially energy -- continue to catch a bid, commodity-centric currencies like the Australian and Canadian dollars fail to show any definitive signs of strength.
At the same time, the US dollar isn’t doing much either, as the US Dollar Index $DXY has been chopping sideways for several months.
Long story short, indecision is the overarching theme for forex markets at the moment.
One forex pair that does an excellent job of illustrating the trendless nature of these markets is the AUD/JPY.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The US dollar can’t catch a bid.
Since briefly reclaiming its November highs last month, it’s been nothing but down and to the right for the US Dollar Index $DXY.
Many global currencies have reacted by catching higher – especially the euro. But commodity-centric currencies – like the Canadian and Australian dollars – have had a more muted reaction. We think that’s likely to change in the coming weeks and months.
With interest rates on the rise around the world and crude oil prices pushing above 90, we think it’s just a matter of time before we begin to see some real strength from these currencies – especially if we see a sustained downtrend in the USD.
Today we’re going to highlight one of these forex pairs, as we think it’s poised for a major move. Let’s talk about the USD/CAD.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Commodities and cyclical assets have remained resilient, defying headwinds from the US dollar for nearly a year.
But the US Dollar Index $DXY is sliding lower as evidence mounts in favor of further weakness…
Could those headwinds soon fade away?
Today, we’re going to highlight some critical developments and discuss what they mean for the US dollar, stocks, and commodities in the weeks and months ahead.
Let’s dive in!
First is a chart of the US Dollar Index $DXY:
Its inability to hold above the November 2021 highs screams "failed breakout!"
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Risk assets are on the ropes after taking a series of heavy hits last week.
Equities have been a sea of red across the board as selling pressure broadens out. Growth continues to collapse, and even many of the latest leadership groups – like banks – are failing to hold their breakouts.
When we look inside the stock market, there's certainly a bear market feel to the price action in recent weeks. For example, offensive areas are being sold indiscriminately while defensive sectors make new relative highs.
But when we look outside the stock market, the story is very different. Despite the volatility, we’re still not seeing much of a bid in traditional safe-haven assets.
In today’s post, we’ll focus on the Japanese yen. But it’s the same story for gold and Treasuries.
Here is a look at all three. From top to bottom, this is the Gold ETF $GLD, the US Treasuries ETF $IEF, and the Japanese yen $JPY:
After weeks of failing to hold breakouts on an individual currency basis, the tight coil in the DXY finally resolved lower.
The brief reprieve in USD strength was immediately felt across markets last week, with cyclical/value stocks and procyclical commodities catching an aggressive bid.
Now that the headwinds associated with dollar strength appear to be easing, will risk assets enjoy a tailwind in the form of sustained USD weakness?
Or was this just the latest fake-out from the DXY?
Let’s take a look at a couple of charts and highlight the levels we're watching in the coming weeks and months.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
There's been a subtle risk-on tone in recent weeks. With each passing day, it's been spreading to more and more markets and charts.
Rates are rising around the globe. The underlying uptrend in commodities is intact and looks ready for another up leg. Our equal-weight commodity index is resolving higher from its current range. And cyclical stocks such as energy and financials are breaking out to new highs.
All of these events speak to a growing risk appetite and support higher prices for risk assets.
Although, two areas where we aren't seeing such clear evidence that risk-seeking behavior is re-entering the market would be currencies and our intermarket ratios.
The AUD/JPY cross is still stuck within a range. High-yield bonds $HYG relative to their safer alternatives -- US Treasuries $IEI -- failed to hold their recent highs. And the copper/gold ratio is a hot mess.
We would expect to see decisive upside resolutions from these charts if investors are positioning for another leg higher.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The rally in the US Dollar Index $DXY is stalling out.
With each passing day, dollar internals are weakening, and the prospect of a bullish resolution from the current continuation pattern in DXY is diminishing. We expect these patterns to resolve quickly. And when they don’t, that’s information.
The bottom line is evidence continues to stack against the USD.
With that as our backdrop, let’s check in on a long USD trade that was triggered in November and outline how we want to navigate the coming days and weeks.
