Don’t let the USD index fool you
A lot of traders associate stock market weakness goes hand in hand with USD strength. If you look at the chart below of the UUP and SPX you can see the inverse relationship.
(SPX/UUP – inverse relationship usually means when stocks go up, USD goes down. Or visa versa)
However, currently you are seeing the USD index relatively stable with stocks pulling back today. What you may be missing is the USD is in “stealth mode” rally mode against other currencies. Specifically the commodity currencies like the AUD, NZD and CAD. So, if you look at pairs like the EUR/AUD, GBP/AUD, EUR/CAD, etc. you can see those pairs are somewhat “re-balancing” as traders focus on selling commodity currencies against everything else. A lot of this re-balancing is due to the recent slowdown we are witnessing in China, Europe and the US combined with policy actions out of Europe that has eased near term debt funding pressures of the European periphery. And considering some of these pairs have been hit so hard over the years (see EUR/AUD 5 year chart in particular) as you see those trades unwind it may translate to not much movement in the $DX_F (USD index).
(EUR/AUD breaking years of downtrend causing EUR strength and AUD weakness, even against the USD)
(EUR/CAD daily breaking into a bull flag formation)
(GBP/AUD breaking out of bullish wedge on daily pointing towards 1.6000)
(EUR/USD was rejected at key resistance but also supported on sell offs)
Therefore, in the near term, keep your eye on some of these cross rates especially if you start to see these major levels breached and tested.
Follow me on Stocktwits or Twitter @PipCzar
Disclaimer: I am long EUR/AUD, EUR/CAD and GBP/AUD for a few weeks now and plan on holding for a while