Dollar Talking Points:
- The DXY slipped this past week, but that did little to shake low volatility and the established range
- A laundry list of critical events is due over the coming week, yet implied volatility is still set very low
- See the 1Q 2019 fundamental and technical forecast for the Dollar updated on our trading guides page
Looking for a fundamental perspective on USD? Check out the Weekly USD Fundamental Forecast.
Technical Forecast for US Dollar: Bearish
It’s quiet, very quiet, in the markets. From the global favorite VIX volatility index we find expectations for heavy seas in the benchmark S&P 500 are the lowest since October 3 – before the incredible three-month slide triggered across the financial system to end 2018. I would insinuate anything from that comparison, but conditions have certainly shifted to levels of inactivity that qualify as complacent. And, complacency seeds unpreparedness which can leverage far greater swings when activity levels do start to return to normal. The FX market is no exception to the global rule. From the daily chart of the trade-weighted DXY Dollar Index, we find the world’s most liquid currency is marked measured moves back and forth within its well-worn range. This past week, the index faltered from its effort to turn a February rally into fruitful break of multi-year highs. The subsequent retreat was just as unconvincing as loaded move for the bears. Now, directly in the middle of its 9-month long channel; any effort to forge a new trend (bullish or bearish) must first traverse the range and then leverage the conviction to produce the necessary break.
Chart of DXY Dollar Index with 50-Day and 200-Day Moving Average (Daily)
Taking stock of just how low activity levels for the Dollar currently are, we looked to the 20-day ATR (average true range) for the DXY last week. As a percentage of spot price, it has only dropped further to 0.47 percent the lowest since January (holiday trade) of 2018. Another measure that we’ve been keeping tabs on from a bigger picture perspective is the historical range as a percentage of spot below. The 90-day (equivalent of three-month) range is essentially the narrowest corridor for the currency to trade since summer 2014. We make a lot of reference to this period as it is one of the most extraordinarily quiet periods in recent financial record – and ended with a remarkable shift to extreme trend. Looking across the majors, we find many similar extreme readings. One in particular that should raise alarms comes from USDJPY where it has just closed out the smallest 1-week range that I have in decades of price action. It doesn’t get much more extreme than that.
Chart of DXY Dollar Index with 90-Day Historical Range as Percentage of Price (Daily)
Registering low levels of activity and small ranges is only one half of the diagnosis. More important is determining what could shake the market from its complacency and when. The week ahead of us has a remarkable chance to turn the volatility engine over. There is a range of very high-profile event risk on tap. From the US docket alone, we are expecting the Fed’s favorite inflation data (PCE deflator), the delayed 4Q GDP and Congressional testimony from Chairman Jerome Powell among many other listings. Yet, the threat isn’t just limited to what will come out from the United States. As the world’s principal reserve currency, it has just as much capacity to play liquidity counterpart to other extreme FX moves. Should the ‘meaningful vote’ on Brexit stir the Pound, ECB rate forecasts collapse under its inflation update to drag down the Euro, or the Yen simply wake up; the Dollar will feel the reaction. What is even more concerning in my book is the utter lack of anticipation and preparation for an eventual return of volatility, much less an imminent one charged by event risk. Below is an aggregate of the one-week and one-month ahead expected volatility levels for the Dollar (derived from EURUSD, USDJPY and GBPUSD). While there is some acknowledgement of a dense docket for the week ahead, it is hardly indicative of real preparation.
DXY Dollar Index and 1-Week, 1-Month Implied Volatility Readings Drawn from Majors (Daily)
Speaking of the potential of leveraging Dollar volatility through the activity of driven counterparts, it is still important to watch the health of the entire FX market. The best way of doing that for a ‘relative pricing’ asset class is to find a viable alternative. Gold (below priced in Dollar, Euro, Pound and Yen) finally had its incredible climb challenged this past week, but it wasn’t a full commitment to reverse. If volatility does start to pick up and the metal doesn’t extend its epic climb, it would likely be indicative of liquidity demand which would benefit the Greenback (overlaid in red). That would be the most effective catalyst for a lasting bull trend. Alternatively, risk aversion that shows favor for Gold and this Gold index would signal the Dollar is being wrapped into the same withdrawal from FX that could keep it in range or sliding.
Chart of Equally-Weighted Gold Index and DXY Dollar Index in Red (Daily)
For speculative positioning, we are still having to deal with the delay in net futures exposure. The updates that we have seen since the US government reopened however has signaled a significant drop in bullish interest that far outstrips any of the mild dips that we have seen in the DXY these past few months. These market participants can offer a leading signal to the underlying market itself, but the nature of their holding period can make for a considerable lag. Retail traders’ interests on the other hand are more volatile. We have seen the heaviest net long EURUSD position in months unwind as the pair lifted from 1.1250. This crowd is more comfortable trading the range with presumptions that it will hold fast – a risky assumption. Typically, such appetites will usually flip to neutral when we move through only the most extreme 20 percent of the range. It is fairly remarkable that there remains a notable long skew to close the week.
Chart of Net Speculative Positioning in Dollar Futures Positions from CFTC Report (Weekly)
Chart of Retail Trader Positioning from IG Clients (Daily)