My bearishness on the U.S. dollar index (DXY0) continues as two currency positions in particular have delivered against the U.S. dollar.
A month ago I wrote about the Turkish Lira (USD/TRY) and suggested that the high-yielding currency pair would eventually crack below support at its 200-day moving average (DMA). USD/TRY delivered at the end of May.
The Turkish lira set a new 6-month low against the U.S. dollar as USD/TRY broke down below 200DMA support.
I decided to cover my position last week because currency pairs can experience sharp counter-trend moves after reaching or breaking an important milestone. I believe such a move is underway at the time of writing, and I am fading with a small short position. I am keeping the position small because of the coming meeting of the U.S. Federal Reserve. While financial markets are near certain about a rate hike at this meeting, the market’s reaction to this move is far from certain. I want to keep any dollar positions relatively small going into that meeting. Once USD/TRY follows through with a new low, I will get aggressively short as such a move will confirm a major break of 200DMA support.
The Mexican peso is the other high-yielding currency I have used to short the U.S. dollar. At the end of May I described fading the bounce in USD/MXN into resistance at its 50DMA. That trade turned out well, and I closed out that position on the retest of last month’s 6-month low.
The Mexican peso is on the edge of a new multi-month low against the U.S. dollar. Resistance at the 50DMA held for USD/MXN.
Just as with the Turkish lira, I covered and took profits because I suspected USD/MXN might not be up to the task of follow-through. At the time of writing, a small bounce indeed seems underway. Also like the Turkish lira, I am anticipating a follow-through low on USD/MXN to signal a major new downward swing in the currency pair.
I like these high-yielding plays against the U.S. dollar because I get a good payout in carry while waiting out the next anticipated move. The general downtrend in the U.S. dollar index also means that carry trades will have a tendency to perform well.
The U.S. dollar index (DXY0) is tip-toeing on the edge of a fresh breakdown as the downtrend from the 14-year high continues apace.
This Thursday includes major caveat to forex trades. A real trifecta of potentially major market-moving events will come in the form of 1) the next meeting for the European Central Bank (ECB), 2) testimony at the Senate Intelligence Committee from former FBI Director James Comey on his investigation into Russian meddling in U.S. elections along with commentary on his dealings with President Donald Trump on the matter, and 3) the snap election in the United Kingdom. Needless to say, I am “staying small” going into Thursday!
Full disclosure: short USD/TRY