From the Desk of Ian Culley @IanCulley
It’s time to short the USD.
Based on the weight of the evidence, our bias for the US dollar has flipped bearish.
Our first shot at betting on a weaker dollar was successful, as the EUR/USD hit its target earlier in the month. That’s encouraging!
But it’s important to note most dollar pairs are running into logical levels of support or resistance.
Many of these charts are messy at best.
Except the Mexican peso.
In fact, no currency has stood its ground during the dollar’s parabolic advance like MXN.
Before we dive into the charts, check out our Currency Performance Table from our chart deck:
Only one currency has posted positive returns against the dollar during the trailing one-, three-, and six-month and one-year time frames: the Mexican peso.
This is the definition of relative strength.
Other major dollar pairs don’t look anything like the USD/MXN chart:
While the US dollar went on a parabolic advance against almost every currency in the world, it carved out a head and shoulders continuation pattern against the peso.
Earlier in the month, it sliced through the neckline on its way to fresh two-year lows.
It’s hard to find another currency showing similar strength versus the dollar from a structural standpoint.
As long as the USD/MXN trades below 19.55, we’re short toward a measured target of 17.50.
Despite the high conviction behind the trade, the breakdown hasn’t posted the cleanest action.
Here’s a closer look:
The dollar-peso retested the breakdown level yesterday, offering multiple ways to enter the market. You can trade against our risk level of 19.55, or wait for a daily close below 19.31.
A resolution below that level represents a move to fresh multi-year lows.
Regardless of entry, risks are to the upside above the June pivot lows. We have no business being short above those levels.
With a potential trend reversal underway in the dollar, our focus has shifted to short USD trade setups. We expect this theme to dominate the currency markets in the coming months and quarters.
For now, the USD/MXN offers the best trade on the sheets as our risk is well-defined, and the reward is skewed in our favor. It’s also the weakest dollar pair during the trailing 52 weeks!
What’s not to like?
Thanks for reading.
As always, let us know what you think.
And be sure to download this week’s Currency Report!