As we noted yesterday, EURUSD is finally fulfilling our expectation of a breakdown from the trend established at the Mar 2020 lows.  This move has been a long time coming and has potentially significant consequences for the DXY.

continued for members…

The trend line from Mar 20 held for 15 months chiefly because a weaker dollar was tied to the equity rally. Central banks recognized this, and accommodated the markets.

In the past, breakdowns in EURUSD (increasing dollar strength) correlated with weakness in equities. We saw this repeatedly during 2015-2016.EURUSD broke down again in 2018, contributing to a sharp correction in Sep-Dec 2018 and, of course, a more serious one in Mar 2020.

At that point, central bankers coordinated a very different signal response: a plunging dollar. Along with spiking oil prices and plunging VIX, it helped ensure a tremendous equity rally. They even engineered a breakout of the falling red channel to make sure it wasn’t ignored.

The next big decision, then, is whether to merely backtest the red channel or to re-enter it. A backtest and bounce could be helpful for stocks. Re-entering it, not so much. I’d remain short, looking for at least a backtest at this point.

DXY is very likely to make a higher high in this cycle, with out .618 target at 93.887 looking very good. A push up to 97.367 would backtest DXY’s broken purple channel. I’d be long DXY for at least 93.887.

Meanwhile, USDJPY is rising when called upon to prop up stocks. It contributes to DXY strength. This one is a little trickier. If VIX breaks down, no need to trash the yen any further. If it doesn’t, USDJPY’s continued rise would be very important.

The rest of the charts for the day…again, focus mostly on VIX and whether it continues testing or dropping through the purple TL.

CL and RB are both at a point where they could easily break out. I’d be short both with tight stops at this point.

The rest…TNX continues to ease toward the red TL from last August, so it will have an important decision to make in the next week.

Its course will potentially impact GC, which has somewhat broken ranks with ZN……as it decides whether or not to hold the purple channel bottom. SI is still clinging to its SMA200. Have a great holiday weekend everyone. I’ll be back in the office Tuesday.