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What Different Markets Are Saying about the USD Low

What Different Markets Are Saying about the USD Low

Tyler Yell, CMT, Currency Strategist

Talking Points:

-Multi-Year Picture for USD

-What Other Markets Say about USD’s Next Move

-Trading the USD in H2 of 2014

It’s natural for trader’s to look for an edge in FX. One key way for an edge to develop is to identify turning tides of the fundamentals and confirming price action of such anticipated moves. Today, we’ll look at what’s aligning for the USD as the next possible move. However, we’re not looking to buy low, but anticipate the next big move.

Multi-Year Picture for USD

The USDOLLAR is unique in more ways than one. However, the key difference about the USD vs. other global currencies is that many global markets are priced in USD and the USD is an axis on which many markets rotate upon.

The multiple markets we’ll take a look at today to find the likely next move for the USD are equities, gold, & other major currencies vs. the USD. For each of these markets, we’ll look to key inflection points that could show a break of the prior trend that could usher in a new move of strength on the USD. When multiple markets with key USD influences begin to fall, that can help us build a view toward USD strength. Of course, if these triggers don’t take place, then it’s best to keep with the current trend of USD weakness until such a pattern emerges.

Learn Forex: Big Picture for USDOLLAR Index from 2011 Low

Presented by FXCM’s Marketscope Charts

The chart above is the Dow Jones FXCM Dollar Index with Elliott Wave labels added. The main take away is that the downtrend / correction are undoubtedly still in play below 10,500 on the index. However, we’re holding above a major trendline off the 2011 lows and a weekly close above 10,500 could usher in a resumption of the larger uptrend.

Learn Forex: The ICE Dollar Index or DXY with / 57.6% EUR Weighting

Courtesy of Bloomberg

This different dollar index is used to show you that the DXY is sitting near long-term support around 79. The difference between the two indices is the weighting of other currencies vs. the USD. The DXY has an aggressive weighting toward the EUR at 57.6% whereas the DJFXCM USDOLLAR index has an equal weighting against the AUD, GBP, EUR & JPY. Regardless, you can see both are sitting near long-term support and are currently bouncing. If this week’s low holds, then we could be seeing green shoots for the USD however, we’re not ready to call that yet.

What Other Markets Say about USD’s Next Move

We just looked at two major USD indices that show that we could be coming into long-term support, which is a common bounce point from the current move. However, it can be helpful to look at other markets that are highly correlated to the USD as well. To do this, we first need to ask what markets do well when USD is weak and do poorly when USD is strong.

The first market to consider is XAUUSD or Gold. There is a strong long-term relationship to strength in gold correlating to weakness in the USDOLLAR. The inverse is also true so that weakness in Gold often occurs when there is strength in the USD as seen below.

Learn Forex: Long-Term Inverse Relationship with XAU & USD

Presented by FXCM’s Marketscope Charts

This chart goes back to the top in XAUUSD in summer of 2011. This top in XAU is also when the USD bottomed. On the left side of the chart, you’ll notice there is a highlighted box which signifies current support in XAUUSD. The key point of this box is that if we begin to see weekly closes below this key level of $1,268, that would likely develop in tandem with a strong USD and the DXY & USDOLLAR chart above would likely show strength.

Learn Forex: SPX500 & the USD

Presented by FXCM’s Marketscope Charts

The other market that you can look to that has an inverse relationship with USDOLLAR is equities. We’ll take a quick look at the SPX500 to see this relationship. Taking the recent top in July 2013 in the USD you’ll notice that sparked yet another rally in equities. Therefore, exhaustion and a turn below some key levels on the SPX500 like the 1,850-1,810 zone could signal a turn higher in the USD.

Trading the USD in H2 of 2014

Multiple currencies are trading against hard resistance against the USD. The most notable in my opinion are EUR, GBP, AUD, & NZD. The EURUSD close below 1.3770 would bring about a bearish key week, which can be the start of an aggressive top. However, GBPUSD just pushed hard off 1.700 but still has decently clean fundamentals supporting the currency. AUDUSD & NZDUSD are both near relative levels of resistance but of the two, NZDUSD is near a top. This makes a daily or preferably a weekly close below 0.8535 as a key trigger to entertain a short NZDUSD trade should the USDOLLAR trend be reversing. If not, it’s best to stick to what has been working which is selling the USD against weaker currencies.

Learn Forex: NZDUSD Potential Top Trade

Presented by FXCM’s Marketscope Charts

Happy Trading!

---Written by Tyler Yell, Trading Instructor

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