Big Four Macro Overview: Dollar Index
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U.S. DOLLAR CURRENCY INDEX TVC:DXY
There are extensive fundamental comments, context, and observations in the two DXY pieces written in 2022. They are linked below.
The 70.70 – 121.02 trading range has defined the Dollar trade over most of the last 4 decades. Even at the August 2022 high, DXY remained well within this range.
Since correcting from the August 2022 high, the market is now in the upper center of this range. As I see it, moves inside the bounds of the range are primarily noise. While they present trading opportunities, they mean little in macro terms.
85.25 – 103.82 had defined trading since late 2014. Price managed to breakout last year. The subsequent rally found resistance at the top of the weekly perspective trading channel. After testing the top of the channel in October, price has set back to test the breakout point.
Near term support is defined by the top of the broken range, the roughly 50% retracement of the most recent rally, and the center point of the upward sloping trend channel. It is likely that significant support will manifest in this zone.
A show of strength from this position would strongly suggest an attempt to test the 114.78 high and, potentially, the very upper extremes of the range. A failure would suggest a move back toward the uptrend support and the low of the trading range (85.25).
If the market does test the top of the broader range, my expectation is that a major shorting opportunity will setup. But it somewhat depends on why the market gets there. In earlier pieces I made the case that flight to quality or a Fed that is more aggressive relative to other central banks are the two most likely catalysts.
Volatility: I believe that Vol is more cyclical than price. Periods of very low volatility set up conditions that often lead to explosive moves. Volatility has been gradually removed from this market over the last 30 years. Now the market may be breaking out of the pattern of ever lower volatility peaks. A breakout, particularly combined with a range break would suggest a disruption in the long term equilibrium and move DX from trendless to trending. Vol has broken above its downtrend but still must move above a prior peak to confirm.
DX Futures Weekly: From the buying climax high in late September the market pulled back on high volume and wide price spreads. In this perspective you can clearly see the support confluence and the oversold nature of the weekly chart. Not shown is the trendline across the tops of the old trading range high (see the monthly chart) that also provides support in this zone. Volume is beginning to build again but the lower volume suggests that neither buyers and sellers are particularly active.
Triple Screen Momentum: The triple screen isn’t as useful in a ranging market, but the current setup does suggest an important momentum juncture. I have always found it interesting when, in a bull market, the faster momentum line moves on top of the slower line as is occurring in the monthly perspective. These tests of longer term momentum often mark important junctures.
Fundamentally: Impetus for a test of last year’s highs could be provided by the Federal Reserve increasing rates significantly faster/slower than current expectations or faster/slower than other central banks. Externally, a flight to safety, a significant increase of the intensity of the Ukrainian war (particularly if it weakened the Euro ) or a significant rebound in economic activity could all be enough to produce a rally. When thinking about the Dollar its worth remembering that currency is always relative game. It’s not only the domestic economy and monetary/fiscal policy, but those factors relative to the same factors inside our largest trading partners.
Finally: Many analysts suggest that weakness in DXY has created a rally in risk assets. I believe they have causation backwards. During periods when global risk assets struggle, weakness in risk assets and flight to quality creates flows into DXY . When risk assets do better the DXY weakens as flows reverse to risk. If/when risk assets begin to decline again, flows will again become DXY favorable.
Many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.