Consider all this defensive posturing within the context of the choppy year-two environment we're in, and it appears investors are really beginning to seek shelter from the storm.
And what’s one of the most popular safe-haven assets?
The market environment directed our focal point toward the Dollar. And now that it appears risk is coming off the table, we’re shifting our focus to the Yen.
Usually, when we talk about risk-on/risk-off behavior and the Yen, the AUD/JPY is at the center.
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
We’ve been pounding the table about the broad-based strength from the US Dollar since earlier this month. Due to the momentum of its recent move, we believe this rally could have legs beyond just the near-term... But we'll address that when the time comes.
Though the Dollar gave some of this month's gains back last week, our short-term outlook remains higher. As I write this, many G-10 currencies like the Euro, Pound, Aussie, and Canadian Dollar are all rolling over relative to USD.
We’ll be revisiting this theme plenty as it plays out over the coming weeks to months.
But in the meantime let’s focus on a currency pair that’s bucking the trend, the US Dollar-Brazilian Real $USD/$BRL.
And the market quickly answered with a resounding, YES!
We’ve highlighted several currency pairs challenging crucial levels of support and resistance. Last week, we saw the USD take control at those key levels.
Both the EUR/USD and GBP/USD turned away from critical areas of former support turned resistance. The USD/CAD moved sharply higher from a major area of support. The AUD/USD broke back below a key retracement level after consolidating for the first half of the year. And the NZD/USD retreated from an area of overwhelming overhead supply.
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
The US Dollar trading at key levels against a significant amount of Developed and Emerging Market currencies is the major theme in Currency Markets right now.
The GBP/USD is challenging an area of resistance that acted as support for over two decades but has been a barrier for prices since the Brexit vote almost 5 years ago.
The USD/CHF is on the verge of completing a massive 9-year top.
The USD/ZAR just violated critical support at a decade-long trend line.
And USD/CAD is currently attempting to complete a 5-year double top... with a pattern that looks strikingly similar to that of the DXY Index itself.
Back then, we were already leaning toward "NO." Fast forward to today, and it's more like a "NO WAY."
The reason for this is simple. In that post, we explained the line in the sand for our USD/BRICS Index was ~19.
In the few weeks since, this critical level has been violated. The market has spoken, and it's saying we're in for a lower US Dollar relative to BRIC-country currencies.
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
The US Dollar remains at crucial inflection points versus both emerging and developed currencies.
In last week’s note, we pointed out the critical 19 level in the WisdomTree Emerging Currency Fund $CEW, along with the numerous tests of support in our custom USD vs. BRICS Currency Index.
Not only is the USD looking increasingly vulnerable against emerging and developed currencies, but we’re now starting to see some of the major Dollar crosses break down or resolve lower.
In many cases, these moves are confirming long-term reversal patterns with USD/CAD. For example, the Dollar just broke to fresh multi-year lows relative to the Canadian Dollar.
We reviewed the chart in this column a few weeks back, highlighting the possibility of an impending double top.
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
We’ve recently pointed out the possible double tops in the Dollar index and the USD/CAD, along with our overall outlook for further weakness from king dollar.
But can we find other areas of the market that could provide further insight into the US Dollar’s direction?
After all, many market participants are fixated on the direction of the US Dollar right now as it approaches its key mutlti-year lows.
Why does the Dollar matter so much to investors?
Firs of all, USD and risk assets have had a very strong negative correlation over the last several years. The USD Index bottomed in early 2018 as stock markets around the world peaked. Conversely, the dollar topped during the Covid sell-off when stocks bottomed out at their March 2020 lows.
To gain a clearer picture of the USD, we need to go beyond the Dollar Index and developed currencies.
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
One of the most frustrating questions plaguing investors at the moment is... "How long will this choppy environment last?"
And one question we’re asking internally is… “What is with all these mixed signals!?”
Once the latter clears itself up, we'll have our answer to the former... But not until then.
When the outlook becomes increasingly murky, the best action is to take a step back, let the smoke clear, and weigh each new piece of evidence as it becomes available.
For now, the most important evidence we have is our list of risk-on commodities and equity indexes testing critical levels of interest grows larger by the day.
There seems to be no end in sight. Complicating matters further, we’re actually seeing this kind of price action throughout the risk asset landscape. It's not isolated to a single asset class or region. We're seeing it in Stocks, Bonds, Commodities, and even Currency Markets... and not just in the US, but also abroad.
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
Is the US Dollar Index $DXY on the brink of completing a massive reversal pattern to the downside?
As more evidence comes into the picture, it's looking increasingly dire for the dollar. In fact, we're seeing it trend loweracross all timeframes against almost all of its peers.
And this action has only gained steam over the last week as DXY has plunged to fresh multi-month lows.
Dollar weakness has been a nice tailwind for risk assets since its peak in March of last year. Any additional downside pressure in the coming weeks, months, and even quarters would not surprise us... especially if this daunting double-top pattern breaks lower. If and when this happens, further weakness from both a tactical and structural standpoint is exactly the bet we'll be making.
But it's easy to lose sight of the long-term trend sometimes, especially if you don't zoom out enough. This is why our process of looking at monthly candlesticks is so important. It literally forces us to take a step back and focus on the structural trends at play.
And that’s exactly what we did in this week’s Currency Report. When looking through all of our monthly charts, the big picture view of the US Dollar / Swiss Franc pair really stood out. We're going to discuss it in today's post.
This is a theme we’ve discussed at length over the past six weeks. We've also discussed how we see similar developments in the Commodities and Fixed Income markets.
With this as our backdrop, are you surprised that we're also seeing similar action in the Forex markets right now?
We aren’t!
In this post, we'll highlight two traditional risk-on currency pairs, both of which are trading at critical inflection points.
Let's dive right in.
First up is the AUD/JPY cross. This FX cross is the classic risk-on/risk-off gauge within the currency markets -- and since last November, it has been sending a clear message of “risk-on!”
