The dollar has been very difficult to trade in the second half of 2017. I have made a little, lost a little, and generally just been churned in my FX trades, but I see a good looking setup for being long the dollar soon.
The dollar looks good versus multiple currencies and I may express my tactical long dollar view via USDCAD as well as EURUSD but will focus this analysis on EURUSD. First up let's look at the charts.
As you can see, the DXY is above it's recent down trenline but stuck in its horizontal range which is now also a neckline for a potential inverse H&S. This level has been a ceiling for the dollar but may soon become a liftoff point.
On the actual EURUSD chart we can see the EUR clinging to that horizontal support going back to July and about to test a trendline that had a few touches way back in April. Since the touches were clustered in early April, I am not confident this will be genuine support as this represents a neckline and support that has been tested many times. There have been a lot of jabs at this level and one must believe a lot of limit orders to buy have been filled here with stops just beneath us. If I am right and we have some stops hit that force some selling pressure, there is an enormous amount of dry wood ready to start a blaze (see COT data below).
Below is the DXY 4 hour chart where we can see a possible inverse H&S developing. This neckline is the top of the longstanding horizontal resistance. If this area gives way the move could be a big one.
On the other side of the same coin is the 4 hour chart of the EURUSD which is essentially a mirror image of course.
Okay so the technical setup looks pretty juicy if the neckline does in fact give way, but what about fundamentals and positioning and sentiment etc.
Sentiment Check: Click the headline to read the article
From the article: “Most of the people that we talk to wouldn’t be terribly surprised if, by the end of next year, the dollar was substantially weaker,” especially against the euro, said Daniel Katzive, head of FX strategy in North America at BNP Paribas.
Positioning is in the stratosphere right now and may exacerbate a move down in the Euro. As I stated previously, there is a lot of dry and dead wood waiting for a spark here.
Couple charts that are food for thought.
The XCCY basis swap has been getting some attention lately and has not really moved price which is noteworthy to a trader. However, when I examine the fundamentals of the dollar for longer term thinking, I cannot ignore funding stress and the supply and demand picture for dollars. If repatriation does in fact move forward if the tax bill is ever actually passed - a lot of dollars will be removed from a system that is already in short supply. This could cause a squeeze as overseas firms in need of dollars have less supply available and higher costs will naturally remedy the shortfall of dollars. Whether this plays into the short term trading picture or not, I cannot say, but it certainly warrants close attention.
To me how to trade this is pretty clear cut. Have an order staged and ready to short a breakdown in EURUSD. That or buy a breakout in the DXY or UUP etc. I have been long reflation assets and commodities all year and have had a nice run. I am still long those assets but will look to reevaluate if the dollar does rip out of this range. At least my FX win will help cushion any move down in commodities if one occurs. Also of note will be EM. EM has been very resilient to dollar moves higher in recent months and even years. For some reason I doubt EM could survive a dollar rip without at least a healthy pullback.