Markets chop sideways most of the time. This has been the reality for forex markets for much of the year.
But that’s starting to change as numerous US dollar pairs reach new 10-month highs. The dollar is taking down crucial levels while the US Dollar Index $DXY retests a year-to-date downtrend line and key former highs.
The peculiar coincidence sets up some potentially critical resolutions for these USD pairs.
If they fail, the dollar rally is likely over.
If they hold and additional USD breakouts materialize, selling pressure will intensify for many risk assets.
As of today, quite a few forex pairs are on the verge of supporting a sustained US dollar rally…
Let’s start with the second largest component of the DXY (13.6%), the US dollar-Japanese yen:
The US Dollar Index’s $DXY break toward fresh lows resembles a defiant crawl more than an earnest march.
An image of dragging my children away from the toy aisle flashes across my mind.
(Actually, I let them walk around the store with their toy of choice. And then, we ditch the item before checkout after a couple rounds of negotiations. It works quite well – no screaming involved.)
But while the DXY drags its feet, the individual currencies that comprise the index are picking up the pace.
The Swiss franc is ripping. The euro is posting fresh 52-week highs. And the British pound is hitting our upside objective.
I must admit, I’m a bit jealous. And I’m not the jealous type!
They’ll visit seven cities over the course of the next month, meeting traders and financial professionals from the tip of the Malay Peninsula all the way to Japan.
I can’t physically travel with them, but I can live vicariously through their stories and videos, and, of course, my charts…
Check out the US dollar/Singapore dollar pair:
It’s not a bad time for Strazza and Sean to be in Singapore with greenbacks in their pockets.
To be fair, most markets are trading within their respective year-to-date ranges (except the S&P 500 and Nasdaq 100, of course).
But if we turn to emerging market currencies, we don’t see any sign of hesitation…
Check out our EM Commodity Currency Index (equally weighting the Mexican peso, the Brazilian real, the Chilean peso, and the South African rand) posting new 52-week highs after violating a long-term downtrend line at the beginning of the year:
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.