We already know a big fundamental input. USD is losing the support of a formerly hawkish Fed. The Fed’s tight stance had kept commodities and global markets (esp. EM) contained into January 2019 as USD rallied and pressured these markets.
Technically, the daily chart above is rallying to fill the post-Fed gap (at least) because these being the markets, they never do the expected or linear thing in real time. The market’s job is to throw us off track as best it can if we try to intellectualize every trading day or week. But per the SMAs 50 & 200 on the daily chart above, USD is still in its uptrend. RSI & MACD are not stellar.
The weekly chart shows what has happened since the gold bullhorns pronounced the death of the dollar and an H&S top. It has held aloft.
Ah, but while the 2018-2019 pattern has technically made a higher right shoulder than the head (invalidating that pattern if going by the letter of the law), the chart is a bit of a mess. Specifically, weekly RSI & MACD are on a negative divergence. This could be the precursor to a big new upside breakout or technically more likely, a decline (which obviously goes hand in hand with the Fed-based fundamentals).
Suffice it to say the thick support zone that reaches down to 93 will be key.
But check this out. This chart actually contains a fundamental view as well. The green line is the 2 year Treasury yield. The blue box shows how it positively diverged the Fed Funds Rate (black) and the 3 month T-Bill yield (orange) into late 2015 before the Fed finally got off its ZIRP-eternity stance and hiked. But USD rallied in early 2014 at the 2yr’s early signal! I hardly ever use ‘!’, so you know I think this is important.
Fast forward to today, as we have been noting the 2yr rolled over and in large part created the dovish Fed we find ourselves dealing with today. The 2yr is again leading the Fed but more importantly, it could lead the USD first, as it did in 2014, only this time to the downside.
Now, nothing is certain but that is the message of this chart.
Technical Bottom Line
USD is trending up and above important support with negative divergence in play.
Fundamental Bottom Line
The 2yr Treasury yield is negatively diverging USD in that it is signaling a future rate cut from the Fed. But as with the 2014 positive divergence, USD could respond negatively before the Fed actually cuts if the correlation holds up in reverse to 2014 (a big if, I grant you).
Public Optimism about USD is higher than I’d have thought. This must be habitual, as the trend had for quite a while been a tightening Fed and rising USD, and declining global markets and commodities. It is again rising to the red line and is a moderate negative for USD at this time. As of this morning the rally continues and Optimism is likely rising with it.
Commercial Hedgers appear to have a bit more net shorting to do, which they are probably doing now as the rally continues.
USD bottomed and rallied off of very valid long-term support (not shown in this update, but shown occasionally in the past) at 88 over a year ago. The trends remain up. But the technical picture has some warts. Key support is the thick zone above 93+/-.
Fundamentally, the 2 year Treasury yield is pointing down for USD as it pointed up in 2014. I am not cheerleading a decline in USD, merely showing us all what happened with this relationship historically.
Sentiment is gathering contrary bearish for USD. It appears to have further to go and with this week’s rally it could already be going there (the Hedgers data was collected well over a week ago).