From the Desk of Ian Culley @IanCulley
How funny would it be if the US Dollar Index $DXY peaked with the expectations of a 100 basis point rate hike last month?
And what would that mean for risk assets and the stock market rally?
These are just a few questions that float across my mind as I look through currency charts.
To be clear, the DXY isn’t showing any signs of a top. Momentum remains in a bullish regime, and the index is holding above the upper bounds of its former range.
I’m not going out on a limb here and calling a top in the US dollar. Instead, this is all about execution and remaining receptive to all possibilities.
The DXY isn’t a short. But there are individual pairs that offer well-defined risk-reward opportunities to express a bearish dollar thesis.
I outlined a mean-reversion setup in the British pound/US dollar pair last month. I’m now going to highlight a critical level in the Swiss franc that can be played from either direction.
Here’s a chart of Swiss franc futures:
First, it’s important to note that the Swiss franc has been trending lower since early 2021. It broke to 52-week lows this past April on its way to parity with the US dollar.
But the swissy has stopped going down. And it has retested its 2021 pivot lows from below not once but twice in the past two months. Last year’s low of 1.0576 is a key level as it carries plenty of price memory.
That’s our line in the sand.
What’s great about this setup is you can define risk around the same level regardless of the directional bet.
If and when Swiss franc futures put in a daily close above 1.0576, I like it long back toward the year-to-date highs of 1.1015.
On the flip side, risks are to the downside toward parity as long as it’s stuck beneath overhead supply at those former lows.
You can wait for a decisive breakout higher to buy strength. Or you can get short against a critical level of former support turned resistance in anticipation of continued dollar strength.
Both make sense to me, as the risk-reward is heavily skewed in our favor – long or short.
But if the long trade is working and the swissy is catching higher toward its year-to-date highs, I imagine we’re most likely witnessing similar action in US stock indexes.
Stay tuned.
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Allstarcharts Team