It’s natural for trader’s to look for an edge in FX. One key way for an edge to develop is to identify turning tides of the fundamentals and confirming price action of such anticipated moves. Today, we’ll look at what’s aligning for the USD as the next possible move. However, we’re not looking to buy low, but anticipate the next big move.
Multi-Year Picture for USD
The USD is unique in more ways than one. However, the key difference about the USD vs. other global currencies is that many global markets are priced in USD and the USD is an axis on which many markets rotate upon.
The multiple markets we’ll take a look at today to find the likely next move for the USD are equities, gold, and other major currencies vs. the USD. For each of these markets, we’ll look to key inflection points that could show a break of the prior trend that could usher in a new move of strength on the USD. When multiple markets with key USD influences begin to fall, that can help us build a view toward USD strength. Of course, if these triggers don’t take place, then it’s best to keep with the current trend of USD weakness until such a pattern emerges.
The chart above is the Dow Jones FXCM Dollar Index with Elliott Wave labels added. The main take away is that the downtrend / correction are undoubtedly still in play below 10,500 on the index. However, we’re holding above a major trendline off the 2011 lows and a weekly close above 10,500 could usher in a resumption of the larger uptrend.
This different dollar index is used to show you that the DXY is sitting near long-term support around 79. The difference between the two indices is the weighting of other currencies vs. the USD. The DXY has an aggressive weighting toward the EUR at 57.6% whereas the DJFXCM USD index has an equal weighting against the AUD, GBP, EUR and JPY. Regardless, you can see both are sitting near long-term support and are currently bouncing. If this week’s low holds, then we could be seeing green shoots for the USD however, we’re not ready to call that yet.
What Other Markets Say about USD’s Next Move
We just looked at two major USD indices that show that we could be coming into long-term support, which is a common bounce point from the current move. However, it can be helpful to look at other markets that are highly correlated to the USD as well. To do this, we first need to ask what markets do well when USD is weak and do poorly when USD is strong.
The first market to consider is XAU/USD or Gold. There is a strong long-term relationship to strength in gold correlating to weakness in the USD. The inverse is also true so that weakness in Gold often occurs when there is strength in the USD as seen below.
This chart goes back to the top in XAUUSD in summer of 2011. This top in XAU is also when the USD bottomed. On the left side of the chart, you’ll notice there is a highlighted box which signifies current support in XAUUSD. The key point of this box is that if we begin to see weekly closes below this key level of $1,268, that would likely develop in tandem with a strong USD and the DXY and USD chart above would likely show strength.
The other market that you can look to that has an inverse relationship with USD is equities. We’ll take a quick look at the SPX500 to see this relationship. Taking the recent top in July 2013 in the USD you’ll notice that sparked yet another rally in equities. Therefore, exhaustion and a turn below some key levels on the SPX500 like the 1,850-1,810 zone could signal a turn higher in the USD.
Trading the USD in H2 of 2014
Multiple currencies are trading against hard resistance against the USD. The most notable in my opinion are EUR, GBP, AUD, and NZD. The EUR/USD close below 1.3770 would bring about a bearish key week, which can be the start of an aggressive top. However, the GBP/USD just pushed hard off 1.700 but still has decently clean fundamentals supporting the currency. The AUD/USD and NZD/USD are both near relative levels of resistance but of the two, The NZD/USD is near a top. This makes a daily or preferably a weekly close below 0.8535 as a key trigger to entertain a short The NZD/USD trade should the USD trend be reversing. If not, it’s best to stick to what has been working which is selling the USD against weaker currencies.
