The U.S. Dollar Finds A Top

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Includes: FXA, FXC, UDN
by: Sentimental Trader
Summary

The U.S. dollar index has likely formed a top just above 98.

Predictions of end-of-2018 bottoms for the Australian and Canadian dollars have held true.

Going long the aussie and the loonie remain good bets.

Expect U.S. dollar weakness and gold strength for the rest of 2019.

The U.S. dollar index (DXY) finally broke above the 97.7 level that had been containing it, but it's a head-fake, and likely a new intermediate-term top for the greenback. A significant U.S. dollar decline instead looks to be finally underway.

DXY Chart From: TradingView

Along with continued strength in U.S. equity markets, and continued weakness (or at least lack of strength) in gold prices, the U.S. dollar index has remained in an uptrend since the beginning of last year. Bottoming in January 2018, the greenback has charted a steady path upward, before repeatedly struggling to break the 97.7 or so barrier, and finally getting across the line last week.

But this hasn't meant new highs against the commodity currencies. Predicted end-2018, early-2019 bottoms for the Canadian and Australian dollars have more than held.

The January 2nd aussie mini-crash continues to have been a good time to buy, though the end of January turned out to be the best time to take profits so far. Since then the Australian dollar has upped and downed between 70 cents and 72 cents U.S. before finally dropping below 70 cents at the end of April.

AUDUSD From: Stockcharts

There has been a similar story for the loonie. The Canadian dollar formed a well-tested bottom at the end of December into the first days of January, then found its maximum strength in the first days of February. Since then the loonie has gradually faded till also bottoming the end of April.

USDCAD From: Stockcharts

For those still long Canadian or Australian dollars, or for those who managed to sell some or all at better prices, it is probably a good time to buy more. Both currencies (as of this writing) have solidly bounced off new lows. And sentiment indicators are firmly pointing to gains.

At its end of April lows, the Canadian dollar again passed below the critical 10% line in the Daily Sentiment Index (DSI) showing very negative sentiment among retail investors, the kind of sentiment that creates bottoms.

CAD DSI From: SentimentReport

The Australian dollar didn't dip quite as low on the DSI. While this can be a sign that additional weakness is ahead, it's unlikely in the case. Sentiment has rebounded for the aussie as well.

AUDDSI From: SentimentReport

More importantly, a number of other proprietary sentiment indicators are saying the saying thing, namely calling for U.S. dollar weakness against the aussie and loonie, as well as the kiwi and Swiss franc. The same was originally true of the euro and yen, though (as of this writing) euro and yen strength since the end of April have led smart money investors to bank on near-term increases for those currencies instead.

Commodity currencies, then, are a good investment right now, risk-reward-wise. The Swiss franc as well. The pound may be too, but the indicators are less convincing. Expect the initial strength of these currencies to last weeks, depending on when they begin a significant rally.

Overall, the U.S. dollar outlook for the coming months is bearish. The greenback has reached a significant sentiment high itself, with just too many traders anticipating further increases. See it's Daily Sentiment Index:

USD DSI

From: SentimentReport

And while it is difficult to anticipate exactly what will happen with the U.S. stock market over the next 6 months, there is likely to be continued high volatility.

Firms like Technical Traders Ltd. have made convincing arguments that the greenback will fall and gold prices will rise. In part at least, because of the election cycle.

Traders would be smart to keep that likely scenario in the back of their mind when placing longer term currency bets.

Disclosure: I am/we are long 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 intermittently long multiple currencies against the U.S. dollar. 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 conduct your own research before putting your capital at risk.