US Dollar Price Action Setups: AUD/USD, DXY, NZD/USD, USD/CAD
US Dollar, DXY, AUD/USD, NZD/USD, USD/CAD – Talking Points:
- Time-cycle analysis suggests the US Dollar is poised to significantly underperform its major counterparts in the medium to long term.
- Golden cross moving average formations hint at extended gains for AUD/USD, NZD/USD.
- USD/CAD poised to sink even lower as price continues to track within a Descending Channel.
As mentioned in previous report, the haven-associated US Dollar may continue to lose ground against its major counterparts, as long-term price analysis suggests a cyclical downturn is in the offing.
US Dollar Index (DXY) Monthly Chart – Cyclical Downturn Afoot
DXY monthly chart created using Tradingview
The chart above highlights the cyclical pattern seen in the US Dollar Index over the past 34 years, with the DXY largely adhering to what appears to be a 16-year rotation. The index set significant bottoms in 1992 and 2008.
After bottoming out, price then seems to rebound aggressively early in the cycle, soaring 24.1% and 26.8% in 1993 and 2009 respectively, before pulling back to key support at the 88.6% Fibonacci. A 6-year period of sustained USD strength follows this counter-trend pullback, with price climbing 50.1% from the 1995 low and 42.8% from the 2011 low, to set key highs in 2001 and 2017.
Bearish RSI divergence in late 2002 seemed to signal the end of the US Dollar’s bull run and triggered a shift in overall market sentiment, as price collapsed through uptrend support and ell 41.6% to eventually bottom in March 2008.
Recent price action and the development of the RSI is strikingly similar to that seen in the first quarter of 2003 and could be indicative of further downside for the DXY, as price slices through the September 2020 low (91.75) and hurtles towards the 2018 low (88.25).
An extended downside push towards the 100% Fibonacci expansion (83.50) looks likely if the 2018 low is breached, with cycle analysis suggesting price could fall a further 23% from current levels before bottoming out in mid-2024.
AUD/USD Weekly Chart – Golden Cross Hints at Extended Gains
AUD/USD weekly chart created using Tradingview
The longer-term technical outlook for AUD/USD remains overtly bullish, as price surges above the August 2020 high (0.7413) to challenge the psychologically imposing 0.7800 mark.
With the MACD hovering at its highest levels since 2011, and the RSI eyeing a push into overbought territory, the path of least resistance seems higher.
A bullish ‘golden cross’ moving average formation also hints at extended gains for the exchange rate in the coming months.
A weekly close above 0.7810 is required to signal the resumption of the primary uptrend and clear a path for price to challenge the 2018 high (0.8136). Hurdling that likely brings the 100% Fibonacci (0.8918) into the crosshairs.
However, if 0.7800 successfully stifles buying pressure, a short-term pullback to the yearly low (0.7564) could be on the cards.
The IG Client Sentiment Report shows 38.14% of traders are net-long with the ratio of traders short to long at 1.62 to 1. The number of traders net-long is 20.49% higher than yesterday and 0.10% lower from last week, while the number of traders net-short is 10.93% higher than yesterday and 13.40% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/USD prices may continue to rise.
Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed AUD/USD trading bias.
NZD/USD Weekly Chart – RSI Indicative of Swelling Bullish Momentum
NZD/USD weekly chart created using Tradingview
NZD/USD rates also seem poised to continue pushing higher, as price storms away from the support range at 0.7100 – 0.7130.
The development of the RSI hints at swelling bullish momentum, as the oscillator continues to track the uptrend extending from the March lows and eyes an entry into overbought territory.
A weekly close above 0.7250 likely paves the way for buyers to drive the exchange rate towards the 61.8% Fibonacci (0.7333). Breaching that opens to door for a challenge of the 2017 high (0.7558).
Conversely, failing to break above the psychologically imposing 0.7300 mark could allow sellers to force NZD/USD back towards the yearly low (0.7096).
The IG Client Sentiment Report shows 39.33% of traders are net-long with the ratio of traders short to long at 1.54 to 1. The number of traders net-long is 15.38% higher than yesterday and 17.10% higher from last week, while the number of traders net-short is 9.95% higher than yesterday and 2.21% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests NZD/USD prices may continue to rise.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current NZD/USD price trend may soon reverse lower despite the fact traders remain net-short.
USD/CAD Weekly Chart – Descending Channel Guiding Price Lower
USD/CAD weekly chart created using Tradingview
USD/CAD looks set to extend recent losses, as price continues to track within the confines of a Descending Channel.
A ‘death cross’ moving average formation, in combination with the RSI dipping to its lowest levels since 2017, suggests the path of least resistance is lower.
Piercing range support at 1.2555 – 1.2590 likely intensifies selling pressure and clears a path for price to challenge the 2018 low (1.2247).
However, if support remains intact, a rebound back towards channel resistance and the 21-EMA could be in the offing (1.2599).
The IG Client Sentiment Report shows 72.92% of traders are net-long with the ratio of traders long to short at 2.69 to 1. The number of traders net-long is 11.33% higher than yesterday and 8.63% higher from last week, while the number of traders net-short is 37.76% higher than yesterday and 19.61% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.
Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USD/CAD trading bias.
-- Written by Daniel Moss, Analyst for DailyFX
Follow me on Twitter @DanielGMoss
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.