Currency Crosses Catching Our Eye

The US Dollar was a major headwind for stocks last year. Each time the Dollar moved higher, equity prices dropped to new lows. The US Dollar Index peaked last September, and shortly afterward, stock prices set their bear market low. Just like with interest rates, the correlation between the Dollar and stocks has disappeared now that currency moves have stabilized.

The DXY has been rangebound since the start of the year. It sits atop a flat 50-day moving average, midway between support and resistance. In other words, there’s no trend to be found over a shorter-term timeframe.

Longer-term, though, the Dollar’s uptrend is still intact. Momentum stayed out of oversold territory throughout the entirety of the pullback, and the index is above 100, which was formerly stiff resistance from 2015 to 2020. That level is now acting as support.

Beneath the surface of the Dollar Index (which is heavily weighted towards the Euro), we’re seeing strength relative to Asian currencies – especially against the Chinese Renminbi. The Yuan has lost 8% of its value since mid-January, and the cross is breaking back out above its 2019 highs. Last October, a similar breakout turned into a failed move. But not all failed moves result in long-term trend reversals, and neither did this one. We don’t want to be betting on China as long as USD/CNY is above 7.15

The Japanese Yen has been similarly weak. It’s lost 12% of its value since mid-January. This chart is a good example of why we don’t put much faith in traditional ‘patterns’. Our brains as humans can’t help but draw them, but our brains are easily fooled. It looked like a classic head-and-shoulders top. Instead, the consolidation resolved in the direction of the underlying trend. (This, we think, is why traditional technical analysis patterns have such poor track records. Many are reversal patterns, when, by nature, trends are always more likely to persist than to reverse.) In any case, the Dollar has found renewed strength vs. the Yen.

Elsewhere in the land of currencies, the AUD/JPY cross caught our eye. The Australian Dollar is knocking on new highs relative to the Yen after a year-long consolidation above support. The AUD is considered a risk-on commodity currency and the Yen a safe haven. As such, this cross tends to move with global commodity prices.

A successful breakout would be quite telling.

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