From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Major world currencies continue to struggle against the US dollar.
Both the euro and British pound have been coiling near 52-week lows against the dollar. We’re also seeing weakness spread among commodity-centric currencies, as the Canadian dollar hit new 52-week lows this week, and the Australian dollar accomplished the same earlier in the month. As for the safe-haven Japanese yen, USD/JPY hit its highest level since 2017 at the end of November.
The bottom line is that we continue to see broad strength from the greenback.
As we wait for a resolution either higher or lower, we can look to these individual forex pairs for an indication of which direction we’re likely headed.
Let’s revisit the potential failed breakdown from the Australian dollar earlier in the month and the recent action in the Canadian dollar for clues.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
All eyes have been on the US dollar and interest rates in recent weeks.
Last week, we saw a timely kick save from the bond market as the 30-year reclaimed its summer lows. Whether the latest rebound in rates will hold is yet to be seen as the 10 and 30 are currently chopping sideways just above our risk levels. We’re watching the long end of the curve closely to see how yields react at these critical levels.
But what about the US dollar?
When we analyze the US Dollar Index $DXY, it’s hard to be bearish, as price is consolidating in a tight continuation pattern following a base breakout and swift leg higher last month. As usual, the direction in which the DXY resolves will have broad market implications and will affect risk assets around the globe.
We know you’re probably tired of hearing it, but this is another big week for markets -- especially the dollar!
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Last week, we pointed out that commodity-centric currencies were beginning to slide.
Our petrocurrency index was making new 52-week lows, and the Australian dollar was on the verge of breaking down. By Friday’s close, the AUD/USD cross looked to have completed a topping pattern and was trading at its lowest level since the summer of 2020.
Seeing one of the world’s leading commodity currencies break down from a major distribution pattern would not bode well for commodities and other risk assets.
But the bulls aren't ready to roll over yet. Investors are back on offense this week, as buyers have already repaired all or most of the damage that was done to stocks and commodities last week.
They needed to come out swinging after the latest flurry of selling pressure… And that’s exactly what they did!
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
As we near the close of another month, crude oil is once again front and center.
At the end of October, black gold was ripping to new seven-year highs while interest rates rose and cyclical stocks kicked back into gear.
Today, this picture has dramatically changed.
Crude oil is currently about 20% off its highs, as prices have collapsed back below our risk level.
Crude dropped $10 during last Friday’s volatile session and continues to slide lower this week. Just look at this bearish candlestick on the monthly chart:
Stocks up and down the cap scale were breaking out to new highs and energy futures were resolving higher from multi-year bases -- all while emerging-market and commodity-centric currencies approached year-to-date lows.
Something wasn’t right.
We’d expect these risk-on currencies to catch higher given their strong correlation with other risk assets. But this hasn’t been the case. In fact, seeing as currency markets had been out of sync with other asset classes for months, we really didn’t want to overthink this development.
But what appeared to be another mixed intermarket signal proved a valuable warning.
Fast-forward to today and the weakness that was evident among emerging-market currencies is spreading to stocks and commodities. Small-caps and crude oil are retesting critical breakout levels, and cyclical stocks are failing to sustain their recent moves.
When we broke down the US Dollar Index last month, we pointed out that its strength was rather narrow in terms of how it was performing relative to most individual currencies. Long story short, the recent rally in DXY has been fueled primarily by its two largest components -- the euro and the yen. These two currencies make up more than 70% of the DXY weighting, and the fact that they are at new 52-week lows explains why the index is at new highs.
Although the inverse correlation is not as strong with equities, it still exists. But the USD’s resilience during the second half of this year hasn’t stopped stocks from screaming higher.
While we definitely aren’t in an environment where USD weakness is a tailwind, the evidence continues to stack up in favor of the bulls and risk assets.
The dollar is just one data point. But it’s a rather important one, as the direction of King Dollar has proven to have a profound impact on other asset classes.
Today, we’re going to highlight the decoupling of USD relationships and what it could mean for the rally in risk assets.
Energy futures are resolving higher from multi-year bases. Stocks are pressing to new highs all along the cap scale. And the more cyclical, value-oriented markets are catching a bid and becoming leadership groups again -- think financials and energy.
It appears everything is falling into place. But a few pieces are still missing…
For instance, you might assume the US dollar is under pressure as commodities and stocks outperform.
But it’s not.
In fact, the dollar made new 52-week highs not long ago and has since consolidated at the top of its range while riskier areas of the currency market have struggled to catch a bid.
We’ve highlighted the US Dollar Index and the mixed signals coming from developed currencies in recent posts.
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
Interest rates, inflation expectations, and commodities are all on the rise.
But as these pieces of the intermarket puzzle fall into place, it’s hard to make sense of the strength in the US Dollar Index $DXY. That’s also been on the rise recently.
Even other areas of the currency market don’t quite fit with the action we see in the USD. We pointed out the absence of risk-off behavior in a post last week where we highlighted the broad weakness in the yen as well as AUD/JPY making new multi-month highs.
So what’s going on with the US Dollar Index?
Let’s look under the hood at some individual USD pairs and their trends across multiple timeframes to see what the weight of the evidence is currently suggesting.
First, let’s look at the short-, intermediate-, and long-term trends in some of the main US dollar crosses:
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
All eyes have been on the US dollar as it presses to new 52-week highs.
But its recent rally hasn’t been accompanied by the usual risk-off behavior we’d expect. Actually, it’s been quite the opposite.
Bonds have been rolling over, commodities and cyclical stocks continue to march higher, and the yen can’t catch a bid.
To us, the evidence suggests the USD is momentarily decoupling from its classic intermarket relationships as it grinds higher in the face of all this.
If the US dollar is out of sync with the action in other asset classes, where can we look within the currencies market for a clear perspective of investors’ attitudes toward risk?
That’s right... the yen!
Let’s look at a couple of charts highlighting the Japanese yen’s weakness and discuss what it means for the current market environment.
First up is the classic risk-appetite barometer, the AUD/JPY cross: