Since I last wrote about the US dollar [see here], the DXY index fell by approximately 300 pips. The dollar is now approaching probably the most important support zone in this selloff and bulls would say that the final leg higher is yet to come. While I am a more inclined towards a weak dollar with DXY at 70 or lower over time, I understand bulls’ arguments and I can see the case they are advocating. In this post let me present what would have to happen to make me revise my bear thesis to potentially change my mind and become a bull again.
Let me start with the DXY index and the support zone I mentioned earlier. One should clearly see it from my tweet I posted a few days ago. One could easily say that a correction is due, bears might also argue that a correction would be healthy.. but the real question, if you ask me, is not if a correction is healthy but how deep correction is still healthy and what is a level where a bear should get worried.
— Domen Butala (@DomenButala) July 20, 2017
I will try to show why I think that a correction above 97-98 level would be very worrying and that in this case the bulls might be right!
Taking a look at the individual pairs will give us much more information and a perspective why that might be the case. As always, I would like to start with EURUSD as it’s the most important pair in the DXY index, then will continue with each pair from the index individually and finish with showing some of the major pairs which are not included in DXY.
Euro closed weekly trading at the highest point since Jan 2015 or in 2 and a half years. This looks to be like a major break higher and if the price stays above 1.13 there is no reason for me to be bearish the euro!
I would like to say few words about the euro COT positioning. Many people are saying that hedge funds are the most bullish in years and that the boat is already over crowded. How is this the case if the positioning is flat? Since when a flat position means one is bullish or bearish? This negative sentiment seems to me that there is much more room for the euro to rally. This sentiment reminds me so much to equities sentiment right now.
Next one is USDJPY. While the price stays below 114.50 I think there is no reason to be concerned. JPY seems to be one of the weakest pair of all majors against the dollar, therefore if even USDJPY cannot move higher and breaks lower below 109… I don’t know, but I would say that would be a major concern for the bulls.
I talked about GBPUSD many times already. Crucial level for USD bears to defend is 1.28.
In the last couple of weeks CAD was one of the strongest currencies against the dollar. I wrote (see here) about this potential move and man, it was a good call! USDCAD is approaching a really important support zone at around 1.25. If we get a correction, I wouldn’t like to see the pair trade to above 1.30.
Was that break higher in Q4 2016 in USDSEK a false break?
If price stays below 8.62 there is no reason to be bullish.
The last one in the DXY index is USDCHF. This pair had a chance to break above the resistance at 1.04 level at the end of last year but then rather fell apart below a multi-year trendline.
While the price stays below parity there is no reason to be bullish and if the price manages to close below 0.9450 level then this would be a game over for bulls if you ask me.
I would like to finish of with three major pairs which are not included in the index, they are USDCNH, AUDUSD and NZDUSD. The first one looks very toppy to me, it is already generating lower lows and lower highs on a daily chart.
AUDUSD broke higher of what it looks to be a bottoming pattern. While above .77, one wants to be long this pair.
And the last one is NZDUSD. It managed to close at the highest point in two years, not a bearish characteristic if you ask me.
I showed you 9 individual forex pair against the dollar. I don’t know what you guys think, but the dollar doesn’t look bullish to me. Of course this doesn’t mean that the dollar can’t reverse and generate a rally of epic proportions, but until the levels mentioned are not breached I will have to stay a dollar bear. Only should the conditions change, then will have to revise this case.