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Currency Market: US Dollar Index Grinding Lower

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The US dollar just can't get going on the upside, although emerging market currencies are lagging.

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The US Dollar Index has remained under pressure to close at new eight-month lows at the end of Q3. It is now flirting with the 80 level, and a break of that would bring prices not seen since February. The new headline risk surrounds this government shutdown debacle, although so far it looks like the US Dollar Index is trying to hold the intraday lows set a couple weeks ago during the Fed announcement. The trend is clearly lower for now in the USD, but I am really starting to wonder if this is a shakeout of the weak hands, and maybe the US dollar actually rallies after the shutdown scare passes and QE starts to taper off, which we know will have to happen eventually!


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One thing that has recently caught my attention has been the continued weakness in emerging market currencies. Even with the USD weakness against the major currencies, some emerging market currencies are actually down against the USD over the same period of time, and especially since the Fed announcement a couple weeks ago. The Mexican peso is a great example as you can see in the chart below. It rallied right up to 200-day moving average resistance on the Fed announcement, and immediately failed and rolled back over. There must be something wrong if the peso can't rally against a weak US dollar, and this is exactly the type of market I want to be short. I would look to add short positions against the Mexican peso on any rallies back up in the .0775 range. See the setup below.


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Another emerging market currency that acts even weaker than the Mexican peso is the South African rand. This currency was not even able to rally up to the 200-day moving average resistance after the Fed announcement, and actually looks like it is close to breaking to fresh 52-week lows. Again, this is not positive action if a currency hasn't been able to rally against what has been a very weak US dollar market since the Fed announcement. I would look to add short positions against the South African rand on any rallies back up in the 0.1000 range.


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Good luck out there! It should be an interesting Q4!
Positions in DX options.
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