From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The US dollar is front and center as risk assets hang in the balance.
Earlier in the month, we placed the Australian and Canadian dollars on breakdown alert as they completed major topping patterns.
US dollar strength was expanding at the time, and the AUD and CAD were the last dominos to fall.
Or so it seemed.
What started as strong downside resolutions for these top commodity currencies quickly turned into potential failed breakdowns.
Now that the most resilient currencies are snapping back against King Dollar, it’s compromising the broad US dollar rally and could usher in a more favorable environment for risk assets.
Let’s discuss what it means for stocks and commodities if these failed breakdowns resolve higher.
Here’s a chart highlighting the recent action in the Canadian dollar and Australian dollar futures:
Two weeks ago, these top commodity currencies slipped below a shelf of former lows but only held below those levels for a few days. They’ve both been rallying higher ever since.
Today, the AUD and the CAD are back above their respective support levels and trending higher. If these currencies see a sustained bounce from current levels, it could pull the rug from under the USD rally.
This comes as the US Dollar Index $DXY is at a critical juncture, printing a potential failed breakout of its own. And, as of this writing, the DXY continues to slide below its former 2020 highs.
What does this mean for stocks and commodities?
If the recent moves in the AUD, the CAD, and the DXY do turn out to be failures, further dollar weakness could produce a tailwind for risk assets.
We’re probably seeing a relief rally in stocks. Copper is holding above 4. And many of the consolidations across the commodities space are most likely correcting through time rather than price.
In this scenario, even Bitcoin is likely to catch a bid.
The main idea is that dollar headwinds will ease if these failed moves hold and accelerate in the opposite direction. This kind of action would be constructive for risk assets.
And it looks like that’s the direction we’re headed in for now.
However, we have to keep an open mind that these recent moves might just be false starts. Stocks and commodities could just be experiencing a reprieve from the solid underlying uptrend in the dollar before continuing lower.
Monitoring the Canadian and Australian dollars to see if they’re holding their respective risk levels will offer us solid information as to the health of the US dollar.
As long as they are trending higher, this failed breakout in the DXY is probably a valid one.
As always, let us know what you think.
And be sure to download this week’s Currency Report!