The dollar/yen broke through near term resistance on Tuesday and is testing the primary downtrend in place since the volatile yen carry trade unwind last year. A breakout and advance above key resistance at Y152 could place further upward pressure on the US dollar over coming weeks and is something I am keeping a close eye on. If the yen continues to weaken, this could also trigger a risk-off move in stock markets which have had a strong run in recent months. October has three more weeks left to run.
In terms of the US dollar index, the technical setup points to possible further upside over the near term. The DXY has held above the primary uptrend in place since 2011, and with the recent advance to 98.60 I wouldn’t rule out further strength over coming weeks, particularly given the blackout on official government statistics on employment and inflation. There is risk in my view around the widely consensus view that the Fed cuts rates at the end of the month. However, any advance in the DXY is still likely to encounter heavy resistance above the key 99 and 100 levels respectively. Fed cuts could potentially be delayed into later months this year when there is more clarity around key data points.
Commodities were generally stronger with the Bloomberg Commodities Index edging higher by +0.4% to 106.4 and is now testing key overhead resistance. Oil prices were firmer. Gold made a new record high above $4000oz for the first time. Influential billionaire hedge fund founders Ken Griffin and Ray Dalio both emphasised gold as an alternative hedge against the US dollar and warned what record prices were signalling trouble ahead for the greenback. Profit taking hit silver and platinum while palladium continued to run higher. Comex copper firmed 1% to $5.08 while LME copper consolidated below the record highs. Soft ag was lower, while iron ore rose back above $104.
What was notable given the US dollar rally on Tuesday was the ongoing strength on the gold price – which made a new record high above $4000oz. Global capital flows are still seeing gold as a decent hedge against the major currencies. Yen weakness on Tuesday was therefore likely one factor behind the new record high. It will be interesting to see how gold holds up if the US dollar were to continue rallying over coming weeks.
But has mentioned above, I don’t see any potential dollar strength lasting, but the primary trendline in place since the 2011 bear market lows is proving to be quite formidable in terms of providing a key support.
Carpe Diem
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