From the Desk of Ian Culley @IanCulley

The talking heads are forecasting choppy market conditions and a significant correction for Q3.

News flash: The market has been messy for months. And we already experienced a stealth correction beneath the surface.

I’ll keep an open mind, but if commodity currencies start breaking out…

Forget about it!

Stocks have weathered the US dollar’s recent rally. 

Imagine how they’ll perform once the dollar rolls over, especially against risk-on currencies like the New Zealand dollar.

Check out the NSD/USD pair coiling within a symmetrical triangle after retesting its 2020 low:

I’m not a fan of symmetrical triangles, as I’ve found measuring risk with diagonal boundaries far less reliable than horizontal support/...

From the Desk of Ian Culley @IanCulley

The smart money is snatching up Canadian dollars.

Last month, commercial hedgers extended their Canadian dollar exposure to their largest net-long historical position.

While positioning represents a condition – not a signal – we can only view the hedger's appetite for the loonie in one light…

Bullish!

Notice that extended commercial long positioning (the bright blue line in the lower pane) coincides with critical inflection points:

These market turns preceded extensive rallies in 2016, 2017, and 2020.

Before boarding the loonie’s next rip-roaring rally, price must provide a well-defined entry with a favorable risk-to-reward profile.

But the past two years of sideways action look more like a topping or bearish continuation pattern, not a bullish reversal:

The bullish argument for Canadian dollar futures doesn’t improve when we slap on a...

From the Desk of Ian Culley @IanCulley

So much for buying the Japanese yen.

Forex markets are taking a shot at the Japanese currency as the aussie, kiwi, and Canadian dollars post fresh decade highs versus the yen.

Not to be outdone, the USD/JPY pair is printing its highest daily close since April 1990!

Check out the dollar-yen’s eight-week base breakout:

The path of least resistance now points higher toward 170, but only if the USD/JPY trades above 158.

I’ve been bearish the dollar-yen pair since it peaked in April. However, as traders, we must update our prior biases based on the current data. And it doesn’t get much more bullish than a new 34-year closing high.

Today’s USD/JPY breakout not only flips my outlook for the yen. It also impacts my view of the...

From the Desk of Ian Culley @IanCulley

Check out these currency headlines:

The Buck Strikes Back… 

Investors Sideline a Defiant Dollar… 

Dollar Down? The 10-Year Says “Yes!”... 

The USD Rally Proves Sticky… 

Weighing a Potential Dollar Breakdown…

Well, which is it? Is the dollar going up… or down?

I have no idea. 

But given the market's current shape, your best forex bets are to short the euro and buy the yen…

If that sounds familiar, I shared a similar perspective during last month’s Fed Day.

A month and a half later, the euro is trading at...

From the Desk of Ian Culley @IanCulley

The US Dollar Index $DXY is violating its year-to-date trendline.

Is this it? Will the dollar finally follow the breakdowns in crude oil and interest rates?

The forex markets say, “Not so fast…”

Following yesterday’s breakout, the British pound is slipping back into the box as the greenback digs in its heels:

Fading the failed GBP/USD breakout earlier this spring proved rewarding. If you’re feeling spicy, you can take another shot at a mean reversion toward 1.25 – but only if the pound is trading below 1.2750.

On the flip side, I like buying the GBP/USD if it reclaims 1.2775 with a target of 1.3150. This trade will only work if DXY is trending lower. 

The euro is also running into resistance – down 40 pips this morning:

...

From the Desk of Ian Culley @IanCulley

All signs point to a weaker dollar.

Crude oil slipping below 78… interest rates cutting through a multi-month trendline… emerging market currencies hitting fresh year-to-date highs… risk assets ripping…

Yet the buck refuses to budge.

The US Dollar Index $DXY is holding steady at a confluence of support, marked by a critical polarity zone and the year-to-date trendline:

As long as DXY remains above the former resistance level of roughly 104.25, a bearish bias is challenging to maintain.

On the flip side, a decisive close below the April pivot low of 103.88 signals a shift toward dollar weakness....

From the Desk of Ian Culley @IanCulley

Risk assets are enjoying record-breaking highs.

Dr. Copper, Papa Dow, and international equity indexes such as the FTSE 100 are making the new all-time highs list. And Bitcoin will likely join them as it climbs back above 70,000.

Yet the defiant dollar remains afloat.

Nevertheless, risk-seeking behavior, Emerging Market currencies, and interest rates imply the dollar will eventually sink.

Earlier this month, the US Treasury benchmark interest rate led the US Dollar Index $DXY in violating a year-to-date trendline. 

Here’s the US 10-year yield $TNX overlaid with DXY:

The dollar follows the same path as rates. Therefore, the US dollar should follow if the 10-year yield is posting a valid breakdown.

Plus, many of our...

From the Desk of Ian Culley @IanCulley

May showers and meme stocks are rolling through.

Roaring Kitty is back, leaning into his detractors with his trademark flair. 

AMC and GameStop $GME are ripping. Gold mining stocks are picking up the pace. And the US dollar…

Surprisingly, it’s still holding above former support.

The 105 - 104.75 area marks the spot for the US Dollar Index $DXY: 

A decisive close below that key polarity zone places the dollar back in the box, giving stock market bulls free rein.

Yet investors don’t seem to care about the greenback. 

Despite DXY’s sticky former highs, risk assets continue to crank.

Check out Dr. Copper and the aussie-yen posting fresh...

From the Desk of Ian Culley @IanCulley

Buyers are coming to the dollar’s rescue following last week’s drop.

But I’m still bearish. 

Of course, none of that matters if the US Dollar Index $DXY continues to rally and these trade setups fail to trigger entry signals.

Here’s a quick look at the DXY finding support at a critical retracement level:

It’s a logical area for dollar bulls to take a stand as a shelf of former highs act as support.

However, crude oil's slide below a similar shelf of former highs raises doubts about a sustained bullish defense. 

The DXY’s 105 level has acted as an excellent line in the sand. I continue to track this area of the chart and Friday’s low of 104.52 for confirmation of dollar weakness.

If the dollar rolls over, the following trades will track toward our initial targets…

The euro

Last week...

From the Desk of Ian Culley @IanCulley

The Japanese government isn’t playing games.

Currency crisis or not, Tokyo is willing to defend the yen in the open market. It's proven this multiple times over the past three years, and today’s FOMC-related volatility will likely test its resolve. 

Considering previous yen-buying interventions, the dollar, interest rates, and the dollar-yen pair could be headed lower in the coming months.

Before we dive into the yen, here's a quick update on the action in the euro and pound.

The euro retested its breakdown level from earlier this month, forming a bear flag:

A close below 1.06 completes the flag pattern and sets a rough downside objective of 1.0450.

The British pound also pulled back this week:

Instead of simply...

From the Desk of Ian Culley @IanCulley

Did you see the candlestick in the Mexican peso last Friday?

It was all wick!

The way I learned it, you want to trade in the opposite direction of blow-offs like this. 

That means betting on a stronger peso and an end to the stock market correction.

Check out the XXXL lower shadow in the Mexican peso futures (denominated in USD):

Last Friday’s intraday swing spanned six percent and registered the highest single-day ATR reading since March 2020.

Despite the earth-shattering volatility, the bulls prevailed. That’s the critical lesson from last week’s action: The bulls immediately repaired the damage. 

That trend will likely continue in the coming weeks and months. If it does, US stocks, especially the materials sector, will resume their uptrend.

Check out the historically positive correlation between the Mexican peso and the Materials Sector ETF $XLB:

...

From the Desk of Ian Culley @IanCulley

Have you noticed these trends driving the markets?

Commodities are ripping. The energy sector is outperforming. Interest rates are climbing while US treasury bonds fall apart…  

Of course, we can’t forget about the US dollar’s rally.

I continue to err in the direction of these underlying trends. But the dollar rally will likely run out of gas soon…

Check out the US Dollar Index $DXY printing its highest level since November. 

My near-term DXY bias flipped bullish late last month. Aside from improving momentum and multiple tests of overhead supply, our bullish USD trades shifted my outlook.

The tactical shorts in the British pound and New Zealand dollar were in play and have...