Heightened concern about global trade wars, tax reform and other fundamental facts have resulted in many investors shifting capital from risk assets toward classes that offer stability. One of the clearest ways to monitor the shift in investor sentiment is to look at the underlying trends of major world currencies. Given the rise in popularity of niche exchange-traded funds (ETFs) such as the various ones discussed below, it is now possible to analyze the shift in global demand and to notice that investor favor is undoubtedly being given to the U.S. dollar. (For related reading, see: The Seasonality of the US Dollar.)
Invesco DB US Dollar Index
Taking a look at the chart of the Invesco DB US Dollar Index (UUP), which is used as a cost-effective method for tracking the value of the U.S. dollar relative to a basket of six major world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc – you'll notice that it has been trading within a defined uptrend since late April. Active traders will note that the ascending trendline and the 50-day moving average have acted as consistent levels of support and have offered ideas for strategic entry prices on each attempted pullback, and most traders will look for this behavior to continue into the future. The recent bounce on higher-than-average volume will likely be used to confirm the move higher, and based on the pattern, and stop-loss orders will likely be placed below $25.09 or the psychological $25 level depending on risk tolerance. (For more, see: The US Dollar Is Breaking Out.)
The Canadian dollar has struggled to move higher since it closed below its 200-day moving average in late February. Taking a look at the chart of the Invesco CurrencyShares Canadian Dollar Trust (FXC), the bears are clearly in control of the momentum, and the recent close below the short-term level of support (shown by the horizontal trendline) suggests that target prices will be adjusted lower. Stop losses will likely be set either above the descending trendline near $76 or the 200-day moving average, which is currently trading near $76.67. (For further reading, see: Top Investments for US Dollar Appreciation.)
The euro is another currency that has struggled to maintain the interest of the bulls. Taking a look at the chart of the Invesco Currency Shares Euro Trust (FXE), the fund recently closed below several major levels of support. The horizontal trendlines and the long-term moving averages will now likely act as resistance and to major moves higher and will be used by bears for determining the placement of sell orders. In addition, the bearish crossover between the 50-day and 200-day moving averages (shown by the blue circle) is the technical signal of the beginning of a major downtrend, and it appears as though traders are using the recent strength as an opportunity to re-enter their positions at a better risk-to-reward ratio. Active traders will likely maintain their bearish position until the price closes above the 200-day moving average, which is currently trading at $114.89. (For more, see: 3 Factors That Drive the US Dollar.)
The Bottom Line
While talks of trade war and other troublesome news stories hit the headlines, investors seem to be allocating their capital to where they think it will be the safest, and based on the currency markets, this appears to be the United States. Holders of U.S. dollars will likely continue be the beneficiaries of this major reallocation, and most traders will hold a bullish outlook on the greenback until the charts suggest that it's time to change their position. (For more, see: US Dollar Falls to Pivotal Support Level.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.