The US dollar and equities

At the end of last week, we outlined reasons why we thought that a corrective pullback in the U.S. dollar had begun. Given the U.S. dollar index (DXY) had gained almost 10.5% from its 88.25 low of February 2018, a 2-5% pullback would not appear unreasonable.

To take advantage of this view, I shortened the U.S. dollar against the EUR, AUD and JPY. As markets closed on Saturday morning, I was pleased to see these trades working nicely and my own trading account which follows our TECHFX TRADERS trading ideas, had made new equity highs for the year after flatlining in recent months.

Of course, as soon as markets re-opened on Monday morning, the smile disappeared from my face as the fallout from the weekend’s APEC meeting in Papua New Guinea where the U.S. and China clashed over trade, saw equities and other risk assets come under immediate pressure.

A good thing for my short USDJPY trade, however not so good for the long AUDUSD position and both trades have since been closed. In USDJPY, I was able to scale out at various profit targets well ahead of the big 112.20/00 support level. While in the AUDUSD, my trailing profit stop was tagged, which given the bigger size of my AUDUSD trade, resulted in giving back some of last week’s profit.

Where to now for the U.S. dollar then?

From a fundamental perspective, I continue to favour a lower U.S. dollar for all the reasons outlined last week. We can also throw into the mix a -4.4% fall in durable goods orders this week, which was the largest fall in the series since July 2017. This has reignited concerns that the U.S. expansion, which has until now, been the main driver of global growth, is late cycle thereby reducing the need for the Fed to extend its tightening cycle which is supportive of our lower U.S. dollar view.

Offsetting this, as witnessed earlier this week, volatility in U.S. equity markets continues to have a key say in how other asset classes, including foreign exchange performs. Ahead of the re-opening of the U.S. equity market tonight, we note there is a very strong tendency for U.S. equity market to rise, from around the Thanksgiving holiday until Christmas. Anecdotes from this year’s Black Friday retail sales today may provide an indication as to whether history will repeat, as will an ability for the S&P500 to remain above the key 2600/2590 support level. Additionally, the market remains optimistic that the U.S. and China can find some common ground and make a deal on trade at next week's G20 meeting.

Piecing together the arguments above, we remain with the view that the U.S. dollar, as measured by the DXY, will continue to correct lower in coming weeks. However, developments this week have resulted in a reduced trading exposure to the view. Should the S&P500 hold above the 2600/2590 support zone on a closing basis, it would encourage us to re-build our short U.S. dollar positions next week.

Source Tradingview. The figures stated are as of the 23rd of November 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation