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Talking Points:

  • The Dollar dropped across the board Thursday, leading EURUSD to break the 'neckline' of its inverse head-and-shoulders pattern
  • I am a medium-term bear on the Greenback owing to trade wars, political risk, Fed liability and an appetite to diversify
  • Though my view is bearish, that doesn't mean the market has committed to a long-awaited trend on a technical break alone

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A Technical Break that Is Difficult Not to Attract Attention

There was no mistaking it this past session. The Dollar took at serious speculative hit. Technicals delivered a clear picture of the currency's pain with the ICE's DXY Dollar Index readily clearing the 94.25 area that it had held up against for more than a month. This particular measure however is somewhat sloppy and it can be (reasonably) argued that it doesn't represent a reliable measure of the Greenback itself. Looking to an equally-weighted measure of the Dollar drawn from its most liquid crosses, there is a clear sense of an important bearish break as well. As for the 'tradable' element of the Greenback's travails, there were a range of important technical milestones amongst the majors. The most impressive progress was registered via EURUSD. The benchmark exchange rate cleared the 'neckline' of an inverse head-and-shoulders pattern. GBPUSD earned further progress in its month-long reversal by overtaking 1.3200 and NZDUSD cleared resistance on an aggressive, five-month bear trend channel. Though not yet fully committing to their own anti-Dollar reversals, USDJPY, AUDUSD and USDCAD are closing in on important breaks.

Daily Chart of the DXY Dollar IndexEURUSD Daily Chart

What If You're a Medium-Term Bear?

I am a medium-term Dollar bear and have been for some months. Seeing this progression to August's failed bullish break and subsequent reversal could readily prompt me to dive into the remarkable move currently unfolding. However, there a break is a weak qualifier for genuine opportunities. We should look for trends to form. And, while technicals can help confirm momentum or other elements of market behavior post facto, motivation usually finds its bearings via fundamental factors. In evaluating my belief that the currency was at-risk, there were a number of systemic issues that came to mind that could start to work against bullish momentum with even moderate teasing. The Fed's pursuit of a steady tightening regime would alter the currency's relationship to risk trends. Future economic hardship could curb the central bank's intentions and there is more premium to loose than discount to further build out when it comes to this aspect of the market. Political risk is only increasing between the US President's aggressive posture and the oncoming mid-term elections. Then there is the steady beacon of trouble for the currency in the form of an appetite to diversify away from the US Dollar - initiated in earnest by the Great Financial Crisis so effectively spreading a US-based subprime housing implosion and a new appetite to punish the US for its commitment to driving trade wars forward. These are all sufficiently systemic and troublingly realistic threats. Yet, I don't believe these otherwise high-profile efforts are currently unfolding. And, that creates a problem for those seeking momentum.

Probability of Fed Hikes through June 2019 According to CME's Fed Fund Futures

The Pieces Present and the Pieces Absent

When charting out a more dramatic move for the Greenback, the technicals are essentially throwing their weight behind the bears. The technical break from the DXY and EURUSD goes a long way to changing opinions across the currency market - and for much more than just the FX leader. There are 'risk' implications - or at least complications - as well as commodity pricing distortions that follow this move. And yet, there is not a particularly convincing short-term spark to promote the break that was forged this past session. The data was generally favorable (US net household wealth for the past quarter) and systemic threats didn't really come into focus. It is possible that the Dollar succumbs to sheer momentum in selling pressure. Yet, that is an unlikely event given the general state of the financial markets. We need fundamental anchors to draw greater swaths of capital to the same cause - in this case, bearish cause. Trade wars and risk trends have clearly not caught and the Greenback's relation to these themes has shifted over time. Fed potential risk is a candidate, but the actual rate decisions, Press conference and forecasts are all due next week. Another big picture consideration for markets rather than just this particular currency is the struggle required to promote a meaningful trend anywhere in the financial system. Against these issues, I remain troubled by the intent of this Dollar develop. We focus in on the Dollar in today's Quick Take video.

Risk Scale