Dollar Perking Up

One asset class that seems to have garnered quite a bit of attention lately isn't equities or fixed income, but currencies, and in particular the US Dollar ($USD). Is the domestic currency finally ready to move higher after being range-bound for the last nine months?

Last week, J.C. Parets of All Star Charts posed the question "Which way will it go?", in regards to the Dollar sitting at an inflection point of resistance.

Fast forward to the last couple of trading sessions, and we very well may be getting our answer.

Mark Newton of Newton Advisors points out that the Bloomberg Dollar Index ($BBDXY) has broken out of a 4-month downtrend:

Callum Thomas of Topdown charts shows new highs on this Dollar index as well:

Bloomberg also published an interesting article last week on why a big move in the Dollar should be expected over the coming days/weeks, stating:

"Over the last 25 years, there have been three previous troughs in the JPMorgan Global FX Volatility Index. Each time, the U.S. Dollar Index has moved around 10 percent over the subsequent 6-months, according to data compiled by Bloomberg. The volatility gauge is currently trading at its lowest in 5 years." 

Given the recent move in price, we very well could be on the cusp of the newest upward swing.

Mike Zaccardi mentions that the strength in the Dollar over the last year has indeed been a tailwind for domestic equities and a headwind for foreign stocks. If the Dollar does embark on a sustained move higher, I think most would expect this relationship to continue and possibly become more extreme.

Charlie Bilello brings to our attention that the $EURUSD relationship is breaking down as well:

Not only does the Euro seem to be breaking down against the Dollar, but the strength in the Dollar also appears in the $USDJPY relationship, after trading in a very tight range over the last week:

All in all, after a long period of complacency and little action in Forex markets, we may be on the verge of some powerful moves. New strength in the Dollar will most likely have an impact on both domestic and foreign stocks, commodities (especially Crude) and precious metals. While we are only in the beginning stages of this potential move, it will be a very interesting space to watch over the near term.

Thanks for reading and feel free to contact us with any questions or feedback!