Dollar breaking down

I bet you found yourself being a bit early on the market on a few occasions. This can be very risky, because there’s a thin line between being early and being wrong. Having a sound risk management one can prevent losing (too much) money, however one must remember that there are two dimensions of a good trade, time and direction. If either of them is wrong, you risk losing money! Thus I don’t trade on my macro views until the tape confirms them.

I wrote a post Euro to repeat 2017 move? three months ago. Clearly I was early, but now it looks US dollar is finally breaking down, thus confirming euro and other currencies could appreciate versus the dollar.

Let me start with a monthly chart of Trade Weighted US Dollar Index of major currencies by FRED. The broad index looks more bullish too be fair, but it does not offer that much history, so below I will show you an equally weighted index against emerging market currencies too.

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Dollar bears do not want to see a (deep) correction!

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. Read More