Simple and straightforward. That was our roadmap back in early March.
Now, almost three months later, the dollar is putting that strategy to the test as it approaches 105 from below.
That multi-month consolidation with “continuation pattern” written all over it never continued lower.
Instead, the dollar index has chopped sideways within a tight range for almost six months. And the evidence is beginning to support a possible upside resolution…
The lack of broad US dollar weakness caught my attention back in April.
Our G-10 currency index and US dollar advance-decline line were printing potential higher lows, while DXY was on the verge of undercutting pivot lows from earlier in the year. The divergence suggested burgeoning USD strength.
I can’t think of a stronger trend than the dollar-yen last year. It absolutely ripped to the point we were joking everything priced in yen looked good – even gold!
But it wasn’t the only market trending higher at the time. The US dollar and interest rates also rallied together.
Today’s USD/JPY strength raises a painful question for many investors…
Will interest rates and the US Dollar Index $DXY follow?
Before we delve into the broader implications of a USD/JPY rally, let’s outline the setup for those who trade forex markets.
Check out the dollar-yen reaching its highest level since November 2022, completing a six-month consolidation:
Last Friday’s action sent flashbacks of 2022 across my screen.
It was all King Dollar last week as risk assets and bonds sold off in tandem.
But before we all get carried away talking about the next leg higher for the dollar, let’s zoom out to get a read on where the DXY truly stands…
In the middle of a short-term range.
The US Dollar Index $DXY finished last Friday, posting its best week since peaking in late September 2022.
But it’s been stuck between 105 and 101 since December:
The DXY might have gained 1.5% last week, but it’s stuck below a key retracement level. It’s a range-bound mess like much of the market despite the recent bout of strength.
The US Dollar Index $DXY is clinging to the 100 level, refusing to let go despite new 52-week highs for the British pound and a steady rise in the euro.
"Rates, the US dollar, crude oil, and the S&P 500... repeat!"
These charts swirl atop every investor’s mind as markets await the upcoming rate hike decision.
Meanwhile, it’s messy!
The S&P 500 challenges the upper bounds of a multi-month range. The US dollar and interest rates chop sideways. And crude oil remains resilient despite increased selling pressure.
But not all markets are trapped in a trading range right now. In fact, there’s one forex cross breaking down, suggesting lower yields and cheaper crude oil…
It's the nokkie-stocky, the Norwegian krone and the Swedish krone!
Check out the triple-pane chart of the US 1o-year yield, crude oil futures, and the NOK/SEK cross:
A weaker dollar remains a key ingredient for a risk-on rally. Yet, like interest rates, the buck refuses to roll over.
The US Dollar Index $DXY continues to hover well below last year’s peak, holding within a tight range for the past four months.
Today, we’ll review critical levels for DXY as this trendless action defines the chart.
We’ll also look beneath the surface for signs of broad strength or weakness and revisit a binding intermarket relationship for clues regarding the dollar’s next major move.
First, let’s define the critical boundaries of DXY’s multi-month range:
The 105 level has proven a significant area of resistance.
On the flip side, the February pivot lows at approximately 101 mark the lower boundary of the year-to-date range. That’s where we find DXY today.
Trendless price action remains the way right now for currency markets.
Yes, some of our bearish dollar trades have triggered and are trending. But most have not.
It doesn’t mean they won’t, of course. But it would be irresponsible not to consider potential outcomes that conflict with my bearish USD thesis…
If the dollar rips, what USD dollar pair would I use to express a bullish outlook?
The answer: the South African rand.
Check out the weekly chart of the USD/ZAR pair:
The dollar has been in a strong uptrend versus the rand for more than a decade. It’s been one base breakout after another, leading to the USD/ZAR challenging its all-time highs last month.
Check out the chart of Canadian dollar futures with the Commitment of Traders Report (COT) in the lower pane (red line for commercials, black for large speculators, and gray for small speculators):
Commercials hold their largest net-long position since early 2019. Extreme positioning such as this tends to mark key inflection points.
Why?
Because commercial hedgers represent the largest short sellers for any given market. And strong hands move markets.
Fed Chair Jerome Powell spoke this afternoon after the central bank announced a 25-basis-point rate hike.
The fed funds futures were all over the place, from pricing in a 25-basis-point increase to a double-hike. They settled in around a single hike, with a slim chance of a pause.
But, instead of guessing the Fed’s next step or parsing Powell's words, I’ll rather sit back, wait, and prepare to trade a decisive breakout.
When I think about the latter stages of the hiking cycle or a potential pause, my mind immediately turns to one currency in particular…
The Japanese yen.
Since the Fed began raising rates last spring, the yen has been one of the strongest trending markets. It stands to reason it could experience a significant trend reversal as the Fed changes course.
Luckily, we have a clear level to set our alerts and define risk.
