Chart Of The Day: Dollar Headed For A Recovery? Not Over The Long Term

The dollar has been surging today, up almost 1% at time of writing. That's the greenback's biggest daily advance since Mar. 19, when the global reserve currency peaked.

The USD has been trading at the top of the session, demonstrating there's no bearish resistance...at least right now. That's a reversal from recent dollar activity. The buck has been falling for a while, as on-again/off-again expectations for additional US stimulus boosted or weighed on markets depending on where the Congressional negotiations stood. Now that a deal was reached over the weekend, with a vote on the bill expected later Monday, will the dollar jump yet more? 

We don't believe so. Here's why.

To begin with, the currency isn't rising in a vacuum. Treasuries are pushing higher on risk-off, as fears of a new strain of coronavirus in the UK dampens vaccine optimism as inoculations are rolled out worldwide. Officials expect the immunizations will be effective for the new strain, but that's not been proven yet.

In addition, though another round of US stimulus would dilute the value of each dollar already in circulation, one would expect traders to sell the currency when a new stimulus package appears to be a certainty, though that's not the case today. It would seem the added funding about to hit the system has already been priced in.

Sellers are covering their shorts to return their contracts to their brokers, which has added demand into the equation.

Still, in June, economist Stephen Roach warned that the massive shift to fiscal stimulus will blow out the national savings rate and the US's current account deficit. At that time we were bearish on the dollar and the technicals agreed; the dollar was then trading at 97.00.

Now, as it hovers around the 90 level, after shedding as much as 13% from the March highs, could it be time for a dollar recovery? While the dollar might certainly enjoy a corrective rally, we’re betting on a continued long-term slide.

DXY Daily

First, the current up-move could be nothing more than a part of a return-move to the bearish flag the greenback is currently testing.

Second, even if after achieving most of the flag’s implied downside target and the dollar were to blow the continuation pattern, the DXY is still trading within a falling channel since the March peak. Therefore, the onus is on bulls to drive the dollar above the channel. Until that happens, we’re betting on the trend.

Note that the RSI has bottomed, but has still broken out of its falling momentum-channel.

Trading Strategies

Conservative traders would wait for a rally to the top of the channel.

Moderate traders would risk a short if the flag asserts resistance, with at least one long, red candle falling away from the flag.

Aggressive traders would short right now, since there's an amazing risk-reward ratio, as the price is smack up against the bottom of the flag, provided they understand and accept the risk and prepare to trade with an exacting plan.

Here’s an example:

Trade Sample

• Entry: 90.90
• Stop-Loss: 91.10
• Risk: 20 pips
• Target: 89.90
• Reward: 100 pips
• Risk:Reward Ratio: 1:5