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Dollar Short Setups

March 25, 2024
Frank Cabibi

Last week provided a dovish Fed statement after rates remained the same and the path of cuts remained on track for this year. Regardless, the dollar took off as the metals and indices were stagnant. However, the news might have taken a while to kick in. Here are some setups for if the dollar does eventually turn bearish on a dovish Fed.

EdgeFinder Analysis

USOil is back to being a stronger bullish reading on the EdgeFinder at +8. The commodity could be rising due to last week's Fed meeting who are not anticipating higher rates for longer. In fact, they still plan to cut this year.

Lower interest rates help drive risk favored demand as a less strict monetary environment can allow inflation to run higher. Higher inflation tends to cause the price of oil to rise. The trend reading on the commodity has changed from Friday by +1 suggesting that price could continue to push higher.

USDJPY might have turned bearish after failing to break a level of resistance on the 1D timeframe. The BOJ decided to hike rates into positive territory for the first time in over a decade. This shift in monetary policy in Japan could begin to weaken US dollar sentiment.

Although other countries are expecting to cut rates before the US, Japan is the exception. BOJ has just begun its tightening cycle, meanwhile, the US is looking to start cutting this year. There is a stark difference between the two central banks which is now favoring strength in the yen.

Gold remains in bullish territory despite being stuck in consolidation on the 1D timeframe. Smart money has turned bearish on the dollar this week as Friday's report showed an aggressive change in dollar net position to the downside.

It is interesting that we saw USD rise last week despite institutional sentiment. This change in smart money is an indication that the dollar is not looking as strong as we thought last week. If GDP numbers come out lower on Wednesday, dollar outlook will probably weaken too.

Retail Spotlight

Retail is still strongly short metals but is mixed in every other area. USD pairs, oil, and gold do not have a clear directional bias from the crowd. Indices are the only assets getting shorted by retail.

Smart Money Spotlight

Meanwhile, smart money is buying up the indices, oil and gold. USD is the top seller last week excluding the African Rand. Other currencies like GBP, AUD, EUR and NZD were sold last week as well. The combination of index bullishness from COT and bearishness from retail could be enough of an indication that stocks are going to move higher.

Fundamental Spotlight

Because the US is forecasted to lower rates in the coming quarters and Japan has already increased their rates, UJ is a -2 overall on the interest rate score. A weaker dollar and a stronger yen results in a strong negative (bearish) score for this pair.

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