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US Dollar Index Continues Higher, Especially Against Commodity Currencies


The US Dollar Index is grinding higher, the euro is consolidating and commodities are under pressure.

The US Dollar Index has continued to benefit from the "Risk Off" environment over the past week, and it looks to me like it is starting to consolidate just below the 200-week moving average around the 79 level. Since the Index has rallied straight from 75, it would be healthy for it to consolidate here and build up some steam for an eventual break above 79, which should really kick the US Dollar Index rally into higher gear.

As you can see in the weekly US Dollar Index chart below, a move above the 79-80 resistance level would clearly open the door for a move higher into the upper 80s. This clearly highlights why I have liked the Index long as the risk reward ratio is still very favorable for long positions, and I would continue to add US Dollar Index exposure on pullbacks, especially below the 77.50 level.

Here's the weekly US Dollar Index chart:

Click to enlarge

The weakness in the euro over the past month has obviously been the main culprit in the US Dollar Index rally, but the past week it has been driven more by significant weakness in the commodity currencies. I touched on this last week, when I mentioned my short position in the Canadian dollar, but also notice how the Australian and New Zealand dollars have sold off aggressively.

The New Zealand dollar is interesting here because it is already breaking below the early October lows, so this commodity currency is leading to the downside. You can see in the chart below how the "Kiwi" is clearly trending lower after a failed attempt to recapture the 200-day moving average around 0.80, and it is now breaking to new multi-month lows below 0.75. This is not a positive technical development for the New Zealand dollar, and unless it can stabilize to form a double bottom at this 0.75 level, this downtrend could accelerate.

See the NZDUSD breakdown below:

Click to enlarge

As I mentioned last week, I think the Japanese yen could be the real game-changer for this potential US Dollar Index rally. Again, I will look at the USDJPY cross so keep in mind this is an inverse chart of the yen. After the Bank of Japan intervened on Halloween to weaken the yen, it has pulled back to the 77 level which should offer good short-term support. The longer term trend is still in favor of the Yen, but it looks to me like the shorter term trend has turned in favor of the US dollar.

The Japanese yen is one of the few currencies that has held up relatively well against the US dollar recently, and if the yen truly is about to roll over, that would just be another bullish tailwind for a continued US Dollar Index rally. I think a move above 77.50 in the USDJPY cross would confirm a potential top for the Japanese yen.

See the USDJPY short term support below:

Click to enlarge

Be careful out there, and hopefully the holiday seasonality can get the "Risk On" trade going again for a year end rally! I hope everyone has a happy and safe Thanksgiving!

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Positions in EUO, EURUSD
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