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Dollar Faces a Technical Cliff but a Break for USD as Challenged as Dow Rally

Dollar Faces a Technical Cliff but a Break for USD as Challenged as Dow Rally

John Kicklighter,
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Dollar, Dollar Talking Points:

  • The Dow and S&P 500 edged record highs through Tuesday’s close with the wide range of risk-leaning assets offering up a ‘risk on’ bid
  • Meanwhile, the Dollar stands at the threshold of a major technical breakdown with representation on the DXY, EURUSD, GBPUSD and other majors
  • While the Greenback’s risk of steering back into range is more practical than extending a Dow drive to record highs, neither seems easy to sustain against holiday liquidity

The Dow Hits Records Yet Conviction is Still Beholden to Seasonality

There were a few fundamental charges this past session to rouse risk benchmarks to fresh record highs. With Pennsylvania certifying Joe Biden’s electoral win of the state, political stability looked more material and a proposed Janet Yellen for Treasury Secretary seemed a practical next step for stimulus support. Further, the cumulative enthusiasm for vaccines to the coronavirus has unbridled the generally unrepentant risk appetite of the past few months. All told, that would led the Dow Jones Industrial Average to a fresh record high above 30,000. President Trump mentioned this milestone in an atypically brief press conference, calling the round figure a ‘sacred level’. As remarkable as this new peak may be, follow through is still an exceptional hill to climb between a market already running far apace of fundamentals and with a well known liquidity drain dead ahead.

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Chart of Dow Jones Industrial Average with 200-Day Moving Average (Daily)

Chart Created on Tradingview Platform

While the Dow and S&P 500 may be earning much of the glory for their record levels, risk appetition gained traction across the spectrum this past session. While the various assets classes are at different stages of performance, there was nevertheless a recent bid to mark. Global indices would see a nudge higher alongside carry trade and emerging markets. Most remarkable in my book was crude oil which advanced to levels not seen since early March. Under normal circumstances, this broad climb would carry significant weight for the potential for sentiment; but given the present situation, I am particularly dubious of follow through.

Chart of 12-Month Performance for Various Risk Assets (Daily)

Chart Created by John Kicklighter with Data from Bloomberg

While there is some noteworthy technical and fundamental consideration at play, general market conditions are my top concern for market influence at present. Liquidity and volume are distinctly influenced by the anticipation for the Thanksgiving holiday in the United States this coming Thursday. While specifically a US closure, history shows a global drawdown on global capital markets through this period as a sort of ‘self-fulfilling prophecy’ of market participation. While there remains the potential for some acute volatility, trend development – which the present status of risk appetite would need to fuel meaningful progress – requires far more backing.

Chart of Seasonal S&P 500 Performance, Volume and VIX

Chart Created by John Kicklighter with Data from Bloomberg

Dollar Stands at a Technical Cliff

Extending an stretched trend – such as the Dow’s push to record highs – is particularly difficult to inspire among investors who recognize the impractical balance of risk/reward at building exposure at these already lofty levels. In contrast, a hearty technical break that would push an asset back into a broader but well established range is a more practical venture. That is the situation I seen in the Dollar. The DXY Dollar Index is pressuring a multi-month range support around 92 which also happens to be a multi-year Fibonacci retracement. It would be no small task to slip this support and make a meaningful move of the effort given the backdrop, but it is far less taxing than extending a stretched trend.

See what key event risk is on tap for the United States and other major countries on the DailyFX Economic Calendar.

Chart of the DXY Dollar Index with 50-Day and 200-Day Moving Average (Daily)

Chart Created on Tradingview Platform

Among the Dollar pairs that I’m monitoring for its general ‘edge of cliff’ position, there are many crosses with a technical milestone to follow. EURUSD is positioned below 1.19 (though there is a zone up to 1.20), USDCAD is holding at a multi-year trendline support at 1.30 and AUDUSD is moving back towards the 0.7400 swing high. I however am partial to GBPUSD. The 1.3400 resistance is notable as a roughly the swing high from September but it is more markedly the trendline resistance stretching back to the Brexit vote (June 23rd 2016) swing high. With the UK easing lockdown restrictions and talk of a post-Brexit trade deal, there may be additional fundamental lift to earn some traction.

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Chart of GBPUSD Overlaid with 100-Day Moving Average (Daily)

Chart Created on Tradingview Platform

Systemic Matters and Markets

With the news that Joe Biden’s election win in the US Presidential runoff is settling into a January 20th inauguration, markets have started to take more seriously the suggestion that he would nominate former Fed Chairwoman Janet Yellen for the next Treasury Secretary. Given her record on accommodative monetary policy through her central bank Tenure, we may find the next meaningful charge in risk appetite – providing this hasn’t already been largely priced in. There is a notable correlation between global central bank capital infusion and risk appetite performance. If deep pocketed developed economies up the ante it could at least buy a little more time.

Chart of S&P 500 Overlaid with Total Major Central Bank Balance Sheets (Monthly)

Chart Created John Kicklighter with Data from Bloomberg

Ultimately, I believe that risk appetite is seeing its time and potential dwindle. While it is possible to see markets deviate from underlying economy and value for an extended period, the gap can only grow so large before practicalities of exposure kick in. One interesting sign of possible appreciation for excess is the shift in performance for the outperforming tech sector in US equities versus the broader asset class. The Nasdaq 100 to Russell 2000 ratio can signify ‘rotation’. As it happens the ratio has seen an incredible retreat this month from a high that is only comparable to the Dot-com peak. This is not to say I expect the bubble is popping, but I do believe a speculative exuberance has been forged.

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Chart of Nadex 100 to Russell 2000 Ratio Overlaid with Dow with 1-Month Rate of Change (Monthly)

Chart Created on Tradingview Platform

Shifting from conditions to assets, I continue to monitor Bitcoin as the top cryptocurrency edges ever closer to the record high set at the end of 2017. Should BTCUSD top 20,000, it would no doubt earn a run in the headlines of even the ‘old guard’ financial journals. That kind of recognition can act like a boost in gravity for speculative interests to draw more appetite to the market – which would be interesting given this particular leg higher has not seen the same degree of rampant chatter in unusual circles as the previous bubble.

Chart of Bitcoin with 200-Day Moving Average (Daily)

Chart Created on Tradingview Platform

Finally, a quick reflection on gold – the other alternative to traditional currency. The precious metal has taken out some significant technical support in its second significant daily slide. The break of 1,850 is significant, but I don’t believe it represents enough critical mass to generate self-sustaining momentum through the liquidity drain ahead. The 200-day moving average and previous symbolic high around 1,800 on the other hand may carry a little more weight.

Chart of Gold with 200-Day Mvg Avg (Daily)

Chart Created on Tradingview Platform

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.