With stock market investors looking every which way at different market-moving headlines today, let's take a step back and talk about what's really important.
We just got monthly candles. It's time to zoom out.
And when we do, is there a chart more important than the US Dollar Index $DXY right now?
The dollar has had a very strong inverse correlation with stocks and other risk assets for several years now.
Equities have done well for the past two years while the dollar has been rangebound.
Just imagine how they'll do if DXY breaks down from its current range:
This is a major development in the forex market. And when we look under the hood, things are even worse than they appear for the greenback.
With more and more global currencies showing relative strength each day, it’s time to take a look at US dollar internals and see what’s moving.
Relative strength is not just the cheat code for stocks, it also works for the currency market and everything else in between.
We also learn a lot about the breadth of a given market through analyzing internals. This helps us determine how we want to position ourselves to make money.
And right now, it looks like we should position ourselves for a lower dollar over longer time frames.
The following table shows the US dollar is in, or moving toward, a bearish trend regime against most other major currencies.
I get it. The yen was cast as the villain decades ago, and something or someone must take the blame for the VIX hitting 65 earlier this week.
While I prefer to point my finger at the preceding low-volatility environment, the November election, and potential rate cuts, the yen certainly played a part.
But the real question isn’t who, what, when, where, or why.
Instead, every investor wants to know…Was that it?
Is the selloff over?
I think the worst is behind us.
Here’s why…
Check out the USD/JPY chart with a 200-day simple moving average in bright blue (with the percentage above or below the long-term average in the lower pane):
In many ways the yen carry trade is a play on interest rates.
Remember when anything priced in yen was trending higher?
It wasn’t too long ago that if you were looking for an uptrend, all you had to do was throw the yen in the denominator, and voila.
Just last month, the dollar hit a new 34-year high against the yen—levels not seen since the 1980s.
But the tables are turning in favor of the Japanese currency.
While most central banks are either cutting interest rates or considering future rate cuts, the Bank of Japan (BOJ) is hiking—a policy shift that puts a bid beneath the yen…