Thematic Report

Price action – US dollar topping

by Laurence Balanco / Nov 21, 2019

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US dollar set for weakness while global equities remain selective

US dollar toppy. The US dollar index’s (DXY) recent failure at resistance provided by the now falling 50-day MA creates a lower index high relative to the early October high. This action has formed the outline of a potential five-month topping pattern (head-and-shoulders) which marks the end of the DXY’s advance off the February 2018 lows.

Base for the euro, top in the Swedish krona. No surprise to find that the biggest component of the DXY index, the euro (57% weighting in the DXY), has traced out a similar reversal pattern. Over the past five months, the euro has formed a potential basing pattern below the 200-day MA which coincides with the October highs at the 1.118-1.12 area. A break above this resistance zone would support an upside target of 1.15-1.16. The Swedish krona (SEK) is a smaller constituent of the DXY but its daily chart reflects the same topping pattern which has formed above the 200-day MA and the September/November lows at the 9.52-9.60 area. A break below this support zone would project a downside target of 9.12.

Won and renminbi lead with Aussie and Kiwi set to follow. We have already featured the reversal pattern in the Korean won and Chinese renminbi in Price Action – 18 October 2019 with both currencies continuing to work their way towards their respective targets at 1,131 and 6.90. The New Zealand dollar and Australian dollar are two other regional currencies which now show potential reversal patterns.

Copper trade. On the commodity side, copper looks like a potential beneficiary of a reversal in the US dollar. CME Copper futures formed a price/momentum divergence between the June/September lows. This sign of slowing downside momentum has been followed by an attempted basing pattern which has formed below the 200-day MA and early November highs at US$2.71-2.72. A break above this cited resistance zone would confirm a more-than-five-month basing pattern with such a move projecting an upside target of US$3.00-3.02.

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