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US Dollar Facing Measured Breakout and In Its Long Grind Higher

US Dollar Facing Measured Breakout and In Its Long Grind Higher

2019-09-22 08:00:00
John Kicklighter, Chief Currency Strategist
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US Dollar Talking Points:

  • The DXY Dollar index advanced 0.6% this past week without committing at all to progress
  • A wedge has developed these past three weeks, but a breakout won’t readily secure a trend
  • The slow advance from the Greenback over these past 18 months is extremely unusual

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Technical Forecast for US Dollar: Bullish

Not all breakouts lead to trends. In fact, the majority of these frequent technical patterns flounder at technical bounds a little beyond the ‘break point’ or simply lose momentum after a period of time, rather than price, passes. It looks like the Dollar is heading for its own technical ‘resolution’. While near-term break seems highly likely in the near future, the larger chart bounds for the benchmark currency are set comfortably far enough away from Friday’s close to suggest that considerable conviction will be expended simply moving to the outer boundary before the market seriously discusses tipping a trend with actual momentum.

Over the past three weeks, the most popular Dollar Index (the ICE’s DXY) has created a progressive series of lower highs and higher lows. Extending the trendlines drawn from these converging points, we hit an apex sometime next week. It is more likely however that we break in the first 48 hours of the trading week. The range created by the wedge – and generally the frequented highs and lows from Tuesday through Friday – is smaller (0.48) than the 10-day average true range (0.60). Essentially, to stay in this narrow range, we would need to see markets quiet sharply. The more restricted the market, the more violent the potential reversion to normal.

Chart of DXY US Dollar Index (4-Hour)

4-Hour DXY Chart

Chart created with the TradingView Charting Platform

Whether we are looking at the 4-hour chart or the daily tenor, we can see the recent restriction fits very comfortably within the larger rising trend channel for the DXY going back to May of 2018. The more immediate resistance is roughly 98.70 and support at 97.20 (reinforced by the 50-day moving average). A bullish break would satisfy the extreme contrast in volatility to range (the blue line in the chart below) while fitting the underlying trend. The two-year high would quickly come into view with such a move with the early September peak at 99.37 the high-water mark. A drop on the other hand would offer more breathing room. The 100-day moving average stands at 97.60, the 200-day moving average at 97.15 and the aforementioned channel support at 96.60.

Chart of DXY with 50-Day Moving Average with 10-Day ATR to Range Ratio (Daily)

Daily DXY Chart with 50-Day Moving Average & 10-Day ATR to Range Ratio

Chart created with the TradingView Charting Platform

It is important to get a different perspective of the Dollar outside the EURUSD-weighted DXY. It can be argued that the particularly liquid cross’s technical picture does not look much like many of its large counterparts on a short and medium-term basis. And, the lack of those immediate boundaries can deflate the cumulative momentum that we would otherwise see behind the Dollar should multiple pairs ‘break’ in tandem or sequence. Yet, when we reduce the direct exposure to the EURUSD, the single currency shows many of the more important characteristics on the higher time frames. An equally-weighted index is still sporting an 18-month bull trend and 15-month channel with tangible proximity to major resistance levels. Yet, for this alternative view, we are closer to a major break to 3.5 year highs and it would only be a short charge further to highs not since March 2009.

Chart of Equally-Weighted Dollar Index (Weekly)

Equally-Weighted DXY Chart

Chart created with the TradingView Charting Platform

Looing for what is guiding the Dollar in its choppy but persistence advance, one factor that seems to be trailing the currency like a shadow is volatility. These is not causation but rather correlation. Below we have specifically the volatility in the FX market (derived from EURUSD, GBPUSD, USDJPY) which shows that there is still a haven appetite that can borrow more from liquidity than exposure to issues like trade wars.

Chart of DXY Dollar Index with FX Volatility Aggregate (Weekly)

Weekly DXY Chart with FX Volatility Aggregate

Chart created with the TradingView Charting Platform

Another long-term consideration pushing the Dollar forward is the relative position on yields created through monetary policy. While the Fed has cut rates twice in two meetings, it is still sporting a significant advantage over most counterparts and the central bank doesn’t look like it is yet keen to close the gap more quickly – and maybe not even quick enough to even reduce the disparity created as some like the ECB and BOJ move into negative yield. While this has not been an effective day-to-day measure of Dollar performance, it has created a stubborn backbone.

Chart of DXY Dollar Index with Gov’t Bond Yield Spread of US and Group of Majors (Weekly)

DXY Weekly Chart with Gov't Bond Yield Spread of US and Group of Majors

Chart created with the TradingView Charting Platform

In looking for a standout among the Dollar-based majors to highlight for its particular appeal, the EURUSD looks like a mirror of DXY. USDCAD looks positioned for a breakout of its own, but there aren’t as clear levels. AUDUSD has seen a significant drop this past week and GBPUSD continues to climb, but neither is particularly reliable for extended moves or imminent reversals. NZDUSD on the other hand has a very interesting position. It has slipped to its lowest level in four years. Furthermore, if it drops below 0.6200, it would clear a range support stretching back to 2009 and break a general bullish trend defining this young century. Keep this pair in mind.

Chart of NZDUSD (Monthly)

Monthly NZDUSD Chart

Chart created with the TradingView Charting Platform

See how retail traders are positioned in the GBPUSD, EURGBP, GBPJPY along with other key FX pairs, indices and oil on the DailyFX Sentiment page.

In speculative positioning, we continue to see the lack of pressure that we would associate to a windup on a big break that spans weeks or months. In futures markets, there is still a net long position in Dollar exposure, but it is far from the extremes seen in late 2018. It is essentially neutral which seems to contrast to the DXY bearing itself. Shorter-duration attention from retail traders presents EURUSD with a modest bullish bias but nothing extreme. A move back up to 1.1100 – not even a break – could very well find this crowd flipping back to a balance of long-to-short interest.

Chart of Net Speculative Positioning in Aggregate Dollar Futures from CFTC Report (Weekly)

Weekly Chart of Net Speculative Positioning in Aggregate Dollar Futures from CFTC Report

Chart of Retail Trader Positioning from IG Clients (Daily)

Daily Retail Trader Positioning Chart from IG Clients

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