The Buck Strikes Back

From the Desk of Ian Culley @IanCulley

Buyers are coming to the dollar’s rescue following last week’s drop.

But I’m still bearish. 

Of course, none of that matters if the US Dollar Index $DXY continues to rally and these trade setups fail to trigger entry signals.

Here’s a quick look at the DXY finding support at a critical retracement level:

It’s a logical area for dollar bulls to take a stand as a shelf of former highs act as support.

However, crude oil's slide below a similar shelf of former highs raises doubts about a sustained bullish defense. 

The DXY’s 105 level has acted as an excellent line in the sand. I continue to track this area of the chart and Friday’s low of 104.52 for confirmation of dollar weakness.

If the dollar rolls over, the following trades will track toward our initial targets…

The euro

Last week, I outlined a bearish setup for the euro. Those levels still stand.

But my EUR/USD bias will flip higher if the dollar pair trades above last month’s breakdown level.

We can take a long position against 1.0745, betting on a failed breakdown with an initial target just shy of the March high at 1.0950. 

If buyers drive the euro above those former highs, we have a potential failed head-and-shoulders top with a rough upside objective of 1.1225 (July 2023 high).

The pound

Trading the British pound’s recent failed breakout served us well.

Mean-reversion trades continue to be our best bet, so why not trade the other side of the pound on a failed breakdown?

I like buying the pound above 1.2515, targeting 1.2750. 

If the US Dollar Index is heading back toward the lower bounds of its sixteen-month range, the GBP/USD may finally take out the 1.2775 level. The path of least resistance points toward 1.3150 (2023 highs) when it does.

The yen

The Japanese yen provided a quick winner last week, hitting my initial target of 152 within 48 hours. 

I’d rather not press my luck following a winning trade. But the yen likely has another 500+ pip drop in the cards, especially if the dollar and rates begin to roll.

I like selling against the 155-156 area or waiting for a decisive break below 152.

Either way,  a logical downside objective stands at 147.50.

The loonie

Like the British pound, we made money buying the USD/CAD last month. Now, the idea is to make money on the way down.

The retracement level at 1.36 marks our level for a second time:

A decisive close below that level sets an initial target of 1.33 and a secondary objective of 1.32.

I’ll take profits well before the lower bounds of the USD/CAD range since the market remains messy. Plus, I hold a bullish USD bias over longer time frames.

The aussie

The Australian dollar is carving out a multi-month base:

If and when the AUD/USD pair closes above 0.6625, I like it long toward .6875.

The kiwi

The New Zealand dollar is challenging a confluence of resistance formed by a key polarity zone and a four-month downtrend line:

I’ll buy the NZD/USD above this critical juncture at approximately 0.6050, targeting 0.6250 and 0.6375.

To be clear, none of the above trade setups are within range.

Market conditions remain messy.

So, what do we do?

Bet on further mean-reverting action until new information suggests otherwise.

That would mean a weaker dollar in the coming weeks – perhaps months – and a tailwind for risk assets.

But we need to see it to believe it.

Are you selling a weaker dollar?

Or do you think more pain lies ahead for stock market bulls?

–Ian 

Thanks for reading.

Be sure to download this week’s Currency Report!