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Summary
- Beginning in Q4 2024, the US dollar index (DXY) ascent has impressively climbed over 9% since troughing in late September.
- DXY upside accelerated after Trump’s election victory, with roughly two-thirds of the gain from Q4 occurring since the US election.
- As Trump takes power next week, we think the USD could be topping out near term.
Market Implications
- We remain cautious and prudent but like selling USD rallies from here, with a view to the DXY (at least partially) correcting the runup seen since late September.
Impressive DXY Rally Since End of Q3
The DXY bottomed out just above 100 on 29 September 2024.
Since then, the index has rallied about 9.5%, with the close this past Monday the highest since November 2022 (Chart 1).
DXY upside accelerated after Donald Trump won the US election in November.
Since the close on 5 November, DXY rallied just over 6% to the peak on Monday, before pulling back slightly in recent days.
We Have Expected a USD Top Before
On 21 November, we argued the DXY looked to be (at least in the short-term) topping out, and that the index was due a pullback.
The DXY did pull back slightly, closing at ~105.70 on 5 December, about 1.1% lower than when we made our call, but then resumed its rally in earnest to trade near 110 this week.
Long USD Positioning Appears Stretched
In late November, our Momentum report noted CTAs were uniformly long the USD.
This week, momentum players remain long USD across-the-board (Chart 2).
(Chart 2: blue bar is last week’s signal; orange bar is this week’s signal.)
When seeing momentum players uniformly long USD across the majors, especially in EUR/USD and USD/JPY, we think fading this positioning looks attractive.
DXY Technicals Are Neutral
Ideally, we like crowded positioning coupled with stretched technicals.
Using the 30/70 rule for Relative Strength Indices (RSIs), which we have discussed at length, the DXY RSI is currently at ~58, a neutral reading, between the 30 level (oversold) and 70 level (overbought) (Chart 3).
This neutral RSI reading makes aggressively selling the USD harder to argue.
As a result, we prefer to sell into USD strength, scaling into a short position patiently.
Therefore, we think the USD is currently a sell-on-rallies.