technical alert

The US dollar registered sharp gains against the spectrum of currencies today, with the Dollar Index* breaking beyond resistance at a channel top we identified yesterday. While that chart formation has clearly been invalidated, we think the case for a retracement still remains compelling. The greenback's relationship with global stock performance has been strengthening, with the Dollar Index now -85% inversely correlated with the MSCI World Stock Index. This means that the dollar should decline as stocks go up, which makes sense considering that the buck traded in tandem with long-term long-term US Treasuries (a stand-by safe-haven asset) at the height of the credit crisis. Looking now, we see the MSCI Index has apparently broken above resistance of a downward-sloping channel, signalling upside momentum ahead.

US Dollar Index vs. MSCI World Stock Index (6-month rolling correlation):


Source: Bloomberg


MSCI World Stock Index:


Source: Bloomberg


What does all this mean for the US dollar? If stocks are headed higher, one would expect given the stong inverse correlation that it should decline. Why, then, did the dollar break beyond resistance? Simply put, we missed the mark in characterizing the channel as the dominant formation. Looking now, we see prices in a clear Rising Wedge formation. Confirmation is offered by negative divergence with the Slow Stochastic oscillator: price action made new highs while momentum remained effectively range-bound. All told, this means a bearish reversal in the US Dollar remains likely in the near term.


US Dollar Index:


Created Using FX Trek IntelliCharts - Prepared by Ilya Spivak

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