US Dollar Index, DXY, AUD/USD, NZD/USD, Time Cycle Analysis – Talking Points:
- Time-cycle analysis suggests the US Dollar is poised to significantly underperform its major counterparts in the medium to long term.
- AUD/USD soaring towards key psychological resistance.
- NZD/USD eyeing a test of the 2018 high.
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As mentioned in previous reports, the haven-associated US Dollar may continue to lose ground against its major counterparts, as long-term price analysis suggests a cyclical downturn is in the offing.
US Dollar Index (DXY) Monthly Chart – Extended Losses Appear in the Offing
DXY monthly chart created using Tradingview
The chart above highlights the cyclical pattern seen in the US Dollar Index over the past 34 years, with the DXY largely adhering to what appears to be a 16-year rotation. The index set significant bottoms in 1992 and 2008.
After bottoming out, price then seems to rebound aggressively early in the cycle, soaring 24.1% and 26.8% in 1993 and 2009 respectively, before pulling back to key support at the 88.6% Fibonacci. A 6-year period of sustained USD strength follows this counter-trend pullback, with price climbing 50.1% from the 1995 low and 42.8% from the 2011 low, to set key highs in 2001 and 2017.
Bearish RSI divergence in late 2002 seemed to signal the end of the US Dollar’s bull run and triggered a shift in overall market sentiment, as price collapsed through uptrend support and fell 41.6% to eventually bottom in March 2008.
Recent price action and the development of the RSI is strikingly similar to that seen in the first quarter of 2003 and could be indicative of further downside for the DXY, as price slices through Bear Flag support (91.74) and hurtles towards the 2018 low (88.25).
An extended downside push towards the 100% Fibonacci expansion (83.50) looks likely if the 2018 low is breached, with cycle analysis suggesting price could fall a further 23% from current levels before bottoming out in mid-2024.
AUD/USD Weekly Chart – Soaring Towards Psychological Resistance
AUD/USD weekly chart created using Tradingview
Weekly AUD/USD price action also hints at further losses for the Greenback, as price surges towards psychological resistance at the 0.8000 mark.
With the RSI climbing to its most extreme readings since late 2011, and the 50- and 100-week moving averages forming a bullish ‘golden cross’ formation, the path of least resistance seems skewed to the topside.
Remaining constructively positioned above the 38.2% Fibonacci (0.7720) would probably allow buyers to challenge psychological resistance at 0.8000, with a convincing break above bringing the 2018 high (0.8136) into the crosshairs.
Conversely, slipping back below support at 0.7700 could ignite a short-term pullback towards confluent support at the 8-week EMA and 78.6% Fibonacci (0.7573). Hurdling that carving a path to probe the September high (0.7413).
The IG Client Sentiment Report shows 40.73% of traders are net-long with the ratio of traders short to long at 1.45 to 1. The number of traders net-long is 30.41% higher than yesterday and 36.11% higher from last week, while the number of traders net-short is 7.02% lower than yesterday and 9.88% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/USD prices may continue to rise.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current AUD/USD price trend may soon reverse lower despite the fact traders remain net-short.
NZD/USD Weekly Chart – 2018 High Coming into Focus
NZD/USD weekly chart created using Tradingview
NZD/USD looks set to continue moving higher over the coming months, as prices hurtles towards range resistance at 0.7390 – 0.7420.
With both the RSI and MACD indicator storming to their highest respective levels since 2009, a more extensive topside push looks more than likely.
That being said, a short-term pullback could be on the cards if resistance at the 61.8% Fibonacci (0.7321) holds firm, with a breach of support at the 2020 high (0.7241) likely precipitating a downside push towards the 8-week EMA (0.7095).
Alternatively, gaining a firm foothold above the 61.8% Fibonacci would probably clear a path for buyers to begin challenge the 2018 high (0.7437).
The IG Client Sentiment Report shows 34.29% of traders are net-long with the ratio of traders short to long at 1.92 to 1. The number of traders net-long is 19.46% higher than yesterday and 23.36% higher from last week, while the number of traders net-short is 3.07% lower than yesterday and 12.46% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests NZD/USD prices may continue to rise.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current NZD/USD price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Daniel Moss, Analyst for DailyFX
Follow me on Twitter @DanielGMoss
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