The Newest FX Bully in the Markets
A contender for the strongest currency in FX is now emerging and there are several ways to trade this exciting new development. I’ll cover those in detail in just a moment.
But first, a word on the US dollar …
The USDI (the US Dollar Index) tracks the dollar against a half dozen of the world’s major currencies.
I've been saying the same story as far back as March and April when I felt the then-current spike was likely the peak for a very long time in the US dollar.
Ever since then, week over week and month over month, the US dollar has done nothing but track lower. This is unlikely to change due to longer-term and newer trends. USDI has made both a long-term double top and a short-term head and shoulders. Both are bearish.
In fact, once USDI crossed the neckline of that head and shoulders, it provided final confirmation that this reversal pattern is in full force and effect. USDI’s previous 10-year uptrend is now a downtrend.
What’s more, USDI just traced out an inside bar. Such inside bars build energy for a subsequent explosive release, usually in the direction of the major trend.
That's what I would expect over time, but there could be some minor short-term support at the current level. How could this happen?
Well, the dollar has gone down very quickly lately. I wouldn’t be surprised if it takes a breather at current levels.
Then again, any penetration below the inside bar would open up new and lower levels.
One other thing: since breaking below the neckline of the larger head and shoulders, USDI has carved out a mini head and shoulders with a double top as it rebounded off that original neckline.
That adds extra bearishness even if the price does snap back in the very short term.
The summary of all this is that on balance, a weaker USD will be the big story for a very long time. I would look for any significant dollar rallies to get short.
My favorite pair for a dollar short on a risk-reward basis is AUDUSD (the Australian dollar versus the US dollar). That’s because the Australian dollar is strengthening against most major currencies across the board, and especially against the US dollar.
Until recently, AUDUSD has been in a 10-year decline. It dropped from about 95 cents at its peak to about 55 cents at its trough. And at the height of the pandemic, AUDUSD made a panic low and then rebounded to create a bear trap. Anybody who chased those lows and didn't take their profits quickly is now trapped in a wrong-way market.
Not only that, AUDUSD has formed an inverted head and shoulders which is just an upside-down version of what we saw in USDI.
This particular inverted head and shoulders is a bit different than a “normal” one though. The right shoulder is higher than the left one. That creates a sloping neckline, which is even more bullish than a flat neckline. Prices are even more likely to burst through and get traction very quickly.
That being said, consider taking some profits if you were long AUDUSD from a few weeks back when I first recommended this trade. I’m still very bullish on this pair, but in the short-term you might want to take some profits, reduce your risk and keep the rest for the long term.
I still recommend buying AUDUSD on any dips that materialize because I expect this pair will
to go much higher in the months to come.
Your opportunity to access this week’s members-only Video Report ends at midnight … tonight.
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This week’s key focus is the best anti-dollar trades. But here’s what you’ll find in my latest analysis:
- What the latest price action in the US Dollar Index tells us about future short-term and long-term potential
- Why AUD is looking like the best and strongest currency right now (starts at 2:58)
- Is this the right time to be taking some profits on AUDUSD right now? My surprising answer
- How to handle the huge volatility in this AUD pair to get a safer entry price (begins at 7:49)
- Why I normally avoid limit orders and when to use them anyway
- Is it time for EURJPY to roll over yet? My thoughts (starts at 13:12)
- Why I like EURGBP and why it's a position to keep "in your hip pocket" going forward
- Why silver's a puzzle and what to watch for on a breakout (20:31)
- Why the NASDAQ appears to be breaking all the rules ... for now
- Plus much more!
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