The dollar had a massive move higher yesterday. Not a long-term breakout yet, but it’s setting up that way. The dollar is the single biggest medium of exchange in the global economy, so its price has a much more far-reaching impact than most Americans realize. Foreign individuals and businesses use dollar based loans, hold dollar based assets, and quote prices in terms of dollars rather than local currencies. As a result, the currency markets are the largest in the world by far, multiples larger than global bond or stock markets. So when the dollar moves, every financial market participant should pay attention.
The weak yen has been one driver of dollar strength. Yesterday, USD/JPY broke the 100 level for the first time since 2009, and the most interesting part of the move is that it actually drove a bout of dollar buying vs. other currencies as well. In rapid fashion, traders started buying dollars vs. euros, dollars vs. the Aussie dollar, and dollars vs. the British pound. The 3 year daily chart shows the dollar’s approach of long-term resistance:
The dollar strength has continued overnight, not just vs. the yen but also vs. most other major currencies. The dollar index, DXY, above, only has about 1.5% to move to break out above its 2 year highs, which would be an important inflection point. It would likely accelerate the move lower in the commodity complex, and lead to a greater divergence between domestically and internationally exposed stocks in the U.S. (domestically exposed names increase their outperformance).
I am still long FXA puts because the Aussie dollar is vulnerable to multiple themes. Chinese economic weakness and massive overvaluation on a purchasing power parity basis are two characteristics, but both have been well known for years now. Rather, the near-term catalysts are the move lower in commodities and the break in important technical support, which I discussed in Tuesday’s CotD post.
But the Euro is also approaching important technical support levels against the dollar. After Draghi’s mention of potential negative deposit rates last week, the Euro has pushed down to 1.30, which coincides with both the 50 day and 200 day moving averages. The Euro has also traced out a messy, potential Head and Shoulders top that could lead a retest of 5 year lows in the EUR/USD around 1.18:
All of this is to say, don’t ignore the dollar. Some big moves are going on already, but yesterday’s initial impulse higher might be the start of some longer-term dollar strength, with more worldwide implications than any other asset price move this year.