USD sellers are tired

U.S. Dollar

The U.S. economic soft landing that started in 2023 continues. Falling CPI and solid jobs this week show that the doom and gloom will have to wait another month. This should have, in theory, been a perfect environment for risky assets and weak dollar plays like AUD, but instead the most popular USD short is failing right at the 2022/2023 highs.

And while USDJPY stays heavy, a lot of the action is coming through cross/JPY—other USD pairs are in chop/basing mode. USDCAD is 100 pips off the lows, EURUSD is 200 pips off the highs, and even USD/EM looks like it’s trying to base.

We are at the point in the cycle where it feels stupid to even say “long USD vs. emerging markets” out loud as USDMXN (for example) has delivered a Sharpe of 2.5 over the past year, including carry. The charts of USDMXN and USDILS, however, both look supportive. Note how USDMXN depreciated at one slope for most of late 2025 then found  a steeper way down into the end of January. Since then, it’s flatlined and it cannot take out 17.00.

USDILS (HT Phil) made a false break of the lows and has now recovered.

This is happening right at the lows touched in late 2021, right before the tech meltdown.

USDILS is often thought of as an inverted technology proxy in FX and that’s why I mention it here. There are small indications of a USD turn everywhere I look. Positioning is heavily short dollars, and the USD has stopped going down in the short term. You can add the blowoff top in precious metals to the list of reasons not to chase USD shorts here. Next week should see rangebound trading in FX, with a bias to buy USD as specs get bored of a trade that isn’t working anymore.

I continue to like EURJPY lower because I think that supply of USDJPY will remain solid even as the USD rebounds. I had highlighted the fact that EURJPY is now back in the cloud after spending ages above it. Here is a chart of number of consecutive days EURJPY is above the cloud. Unprecedented!

The chart gives you a sense of how crazy this rally in cross/JPY has been and also suggests to me that a reversal could be large and swift. The bottom of the cloud is 180.00, so that’s the first chip shot target and then a break of 180.00 is where you can begin to use your imagination.

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Calendar

Next week’s calendar is fairly weak with a U.S. holiday and Lunar New Year holiday in China.

Speaking of lunar new year, NJ pointed out to me that two major bottoms in USDCNH and tops in gold happened right on lunar new year of 2018 and 2022. Gold demand is theoretically lower when China is on holiday given they are one of the biggest non-price-sensitive buyers over the past 10 years. If you look at what USDCNH was doing into Chinese New Year, it very rarely continues that trend on the other side of the celebrations. If you can avoid going blind while staring at this chart, you will see what I mean.

And it is true that gold underperforms during the week of Chinese New Year. Average 1-week change in gold for all non-Lunar New Year weeks is +0.31% while the average return for gold during the New Year holiday week is -0.08%. All this doesn’t add up to anything on its own, but with many small clues that the USD might bottom soon… This is another brick in the wall. If you have USDCNH shorts, this is a logical time to take them back. The move everyone expected has happened now and we are probably at the maximum strength zone from the PBoC’s perspective. The CNH appreciation (USD depreciation) slope is likely to flatten out now.

USD bears are no longer in control. With no catalysts next week, I expect the USD to rally. Not huge, but enough to annoy the shorts.

And finally: In case you missed it yesterday: My bigger picture view on crypto (8-minute read).

I hope you have an amazing weekend.

good luck ⇅ be nimble