While the U.S. dollar has been strengthening for most of 2019, there are many reasons to think the rally may be over and that the currency will now weaken for the next weeks to months.
The U.S. administration has made it clear this is what they want, and while U.S. central bank rates are still attractive relative to other developed countries, the Federal Reserve has signaled that they won't be making those rates any juicier for the next while.
But let's first revisit my recent predictions for the Canadian and Australian dollars relative to the U.S. dollar. Both currencies did have strong rallies in January as anticipated.
The Canadian dollar reversed course only 5 trading days after publication and gained just over 4% the month of January against the U.S. dollar. This despite continued weakness in the Canadian economy and predictions of ongoing growth problems.
The Australian dollar's mini-plunge on January 2nd also turned out to be a bottom, and one that I suspect will hold for some time. The generally more volatile aussie gained closer to 8% the month of January from the bottom of the hammer, outpacing the loonie.
Sentiment did shift by the end of January, and it wasn't surprising to see a rollback start as we entered February. Both the aussie and the loonie retreated in February and into early March, losing half or more of their gains.
The damage though, seems to be contained. In fact, there are numerous reasons to think that this was the last foray for the greenback for awhile, and a weakening U.S. dollar will give strength to currencies like the Canadian and Australian dollars again, along with others.
The U.S. dollar index (DXY) has hit a familiar resistance zone, and if Friday's rapid rise to 97.71 and then fall-off is a turning point, it will form a triple top with DXY reaching 97.69 on November 12, 2018 and 97.71 on December 14, 2018.
Looking at the AUDUSD and the USDCAD charts specifically, you can see that the retracements have lined up with Fibonacci norms, with (as of this writing) AUDUSD retracing just past .500 then turning back up, and USDCAD retracing to .618 then turning back down, both at pretty close to the same time.
More importantly, sentiment backs this up.
Commitment of Traders charts continue to show support for aussie and loonie increases by commercials (the smart money in currency trading), though this is not particularly timing specific. And in truth, the Australian dollar bets were stronger September to November 2018, and the Canadian dollar bets stronger at the start of 2019.
Other proprietary sentiment indicators take an even stronger stand though, with the smart money betting on both the Canadian and Australian dollar to go up in the next while. The same is true for the pound and the Swiss franc, and in particular the euro, which has suddenly becoming the most favored currency against the greenback. Japanese yen and New Zealand dollar positioning remains more neutral.
Gold sentiment can be another clue to where the U.S. dollar will go. While gold bullishness is not overwhelming among smart money traders, sentiment has been moving in that direction, with signs that when the recent retreat in gold prices is finished we may see a significant lift-off for the precious metal. The recent attempt at quickly regaining $1,300 may even be the start of it.
While the inverse relationship between gold and the U.S. dollar is not perfect, gold prices do tend to go up when the greenback falls against other currencies, so smart money bets on gold tend to predict a lower U.S. dollar as well. See this chart of the U.S. dollar index versus gold:
All of this points toward a weakening stage for the U.S. dollar. So while the February retreats for the aussie and loonie may have stressed out those of you who are still long those currencies, the evidence suggests you should stay long. It may instead be a good time to add those positions, and potentially to make long bets on the euro, the pound, and even the Swiss franc.
Nothing is guaranteed of course, but the most likely current setup is a U.S. dollar index triple top and a U.S. dollar retreat against most currencies, along with generally rising prices for gold and other commodities.
Disclaimer: This article is for information and entertainment only, and not advice to buy or sell anything. Investing comes with a substantial risk of loss. Please be cautious and conduct your own research before putting your capital at risk.
Disclosure: I am/we are long FXC, FXA, GDXJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I/we trade Forex and are long multiple currencies against the U.S. dollar.