From the Desk of Ian Culley @IanCulley
For weeks, evidence has pointed to a top in the US Dollar Index $DXY.
Sentiment, volatility, and momentum thrusts have each suggested an end to the US dollar wrecking ball.
Despite the mounting evidence, price hadn’t indicated any significant weakness in the structural trend – until yesterday!
Check out the chart of the DXY, with the one-day rate of change in the upper pane and the 14-day RSI in the lower pane:
It was the magazine covers in late September and early October that caught our attention. Journalists have an uncanny ability to mark major tops and bottoms, providing an excellent indication of sentiment extremes.
And they nailed it again!
Then it was the volatility and momentum thrusts seen on the one-day rate of change. Extreme volatility and strong directional moves often indicate exhaustion and/or initiation of the primary trend. In the case of DXY, we’ve received both of these signals since September.
This was another huge heads up, as momentum often leads price.
However, without confirmation from price these signals are just noise.
This week, we finally got the confirmation we were looking for with DXY breaking down to fresh multi-month lows as momentum exits a bullish regime.
If this isn’t enough evidence for you, check out the historic momentum thrusts in the top individual USD pairs. The price action in these individual currencies is more than supporting the weakness at the index level.
Here’s the euro/US dollar cross, which makes up 57.6% of the DXY:
Last Friday, the euro recorded its largest one-day rate of change in almost seven years.
Similar readings in 2015 indicated key turning points in the trend, most notably, the end of the 2014-15 decline.
We have no reason to believe this time is different, considering the action from the other major USD pairs.
It’s a similar picture in the US dollar/Japanese yen cross (13.6% of the DXY):
Yesterday, the USD/JPY dropped almost 500 pips! The one-day rate of change captures the extent and significance of the 3.70% loss.
We tend to witness extreme directional moves like this at the beginning and end of major trends. The last time the USD/JPY fell this much in a single session, it marked the exhaustion of a year-long drawdown.
On the flip side, yesterday’s explosive downside action likely signaled the initiation of a new downtrend.
As long as the USD/JPY holds below 142, we can short it toward 125.50.
But it doesn’t stop there.
The British pound/US dollar cross (11.9% of the DXY) had its best day since 1993, gaining more than 3% yesterday.
A single-day return of that magnitude is rare, as it has occurred only a handful of times in the past forty years.
The power of yesterday’s momentum thrust often marks significant bottoms for the pound. This is another nail in the coffin for King Dollar and another momentum thrust favoring risk assets.
The euro, the yen, and the pound account for more than 83% of the US Dollar Index. And all three have experienced extreme rates of change, suggesting sustained USD weakness.
Evidence continues to imply the market is on the cusp of a significant turning point. And it’s hard to imagine a more bullish catalyst than a falling dollar.
From a weight-of-the-evidence standpoint, the dollar is done. And we’re already seeing how risk assets will respond.
Face-ripping rallies are popping off all over the place.
And even the ARK Innovation ETF $ARKK jumped almost 25% in the past two days. Copper, gold, and ARKK…
If that isn’t a mixed bag of risk assets, what is?
The US dollar is falling, and it’s falling fast. It’s time to practice what we preach – remain flexible, update our priors, and change our outlook as the data necessitates.
At the end of the day, the only pivot we should be concerned with is our own.
Thanks for reading, and please let us know if you have any questions!