I may have flipped outright bearish on the U.S. dollar index (DXY0) just in time.
The U.S. Dollar Index (DXY0) confirmed a breakdown below support at its 200-day moving average (DMA). The dollar is also completing the same post-election reversal so many other financial assets and indicators have done.
My change in sentiment started with my increasing bullishness on the euro (FXE). With the euro constituting about 51% of the U.S. dollar index, I realized that it would be hard to remain bullish on the dollar overall while adopting euro-bullishness. flipped outright bearish on the U.S. dollar index as I stepped back and looked at the United States from the eyes of a currency trader who does not live here. The chart above validated my assessment: the U.S. dollar lost 1.0% as it plunged through its critical support at its 200-day moving average (DMA). The 6-month low essentially finished the dollar’s reversal of all its gains in the wake of the election of President Donald Trump. Over the past few months, I have chronicled this kind of reversal as a recurring theme across an array of asset classes. The dollar’s reversal added an exclamation point to these observations.
The dollar’s loss was largely driven by a huge move by the euro. The breakout for EUR/USD validated my latest buying strategy to accumulate long euro positions as traders continued to sell the news of the French Presidential election. I used the breakout to lock in profits on my euro long positions and reset for the next buy-the-dip opportunity.
The euro had a particularly good day against the U.S. dollar index. EUR/USD surged past the post-election peak in a move that continues the upward momentum from the Dec/Jan lows.
Source:Â FreeStockCharts.com
The breakdown of the U.S. dollar also makes the Canadian dollar (FXC) an even more interesting play. Early last week I pointed out how bears were ramping up bets against the Canadian dollar. The latest data on the Commitments of Traders shows that currency speculators rushed to their largest net short position against the Canadian dollar since at least 2008. This surge in bearishness is driving head first into the breakdown of the U.S. dollar and may have become a crowded trade at the worst possible time.
