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Liquidity to Return with the Dollar Peering Over a Technical Cliff

Liquidity to Return with the Dollar Peering Over a Technical Cliff

John Kicklighter, Chief Strategist

Talking Points:

  • The DXY Dollar Index ended in the 'support zone' of a 2.5 year range after a 6 straight month decline - longest in 14 years
  • A number of fundamental themes can prove the next primary driver for the Dollar: political risk, monetary policy, risk trends
  • Market conditions may ultimately provide the most important ingredient for trend moving forward with a turn in liquidity

See how the DailyFX outlook for the US Dollar through the third quarter has fared and what critical themes and technical levels are still critical to the currency's next stages in the Third Quarter USD Forecast.

The Dollar has closed out this past week in one of the most uncomfortable technical positions possible. The DXY Index failed to make significant headway in turning the most recent leg of the 2017 bear trend and has in turn left the benchmark within sneezing distance of clearing the floor of a two-and-a-half year range low. This currency has been battered for good reason. After years of holding the title of 'best performing major currency,' it has seen its fundamental well dry up and speculators seek out distant opportunities elsewhere while they can still take advantage of the extreme complacency across the financial system.

Yet, in this quick change of fortune, we have also found the Greenback on the opposite extreme of the speculative scale. It is heavily oversold with a range of fundamental sources that could theoretically be tapped to support its recovery...should traders want to justify such a turn. At a critical technical boundary, with rising fundamental waves and at what is typically the seasonal turning point for liquidity; there is remarkable potential to be found in this crux of the financial system.

While the potential behind this currency and the market is exceptional, recent history should have taught us not to assume anything of the market's collective conviction. Speculation makes for irrational views, shifting focus and more distant projections. While the Dollar may be the most heavily oversold of the majors over the medium term, it can stretch even further under the right conditions (complacency, dovish Fed forecasts, etc). Therefore, having a bearish break scenario and trade options in mind is critical. My preferred candidates with the Dollar extended its slide would be USD/JPY for the risk implications and AUD/USD given the still-low level of the pair. However, should the pendulum finally swing back in the Greenback's favor, the EUR/USD is the most prominent opportunity. Behind that USD/CAD and USD/CHF are well positioned. We take a more focused and concise look at the Dollar for this weekend Quick Take video.

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

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