Surprise Surprise, Dollar Breaks Out, Small Caps Outperform, EM Underperforms

Last week we wrote how the US dollar could be in for a major move when it breaks up or down out of the major consolidation it has been in for the better part of six months. We wrote that given the setup of the utterly depressed level of FX volatility, a break up or down could be furious when FX volatility mean reverts, as it always does.

Well, since then we’re beginning to see pretty clear signs that the direction of the move is going to be higher (that is unless this move is a false break, which it could still be). As readers can see from the first chart, the US dollar index has clearly moved up and out of the consolidation. The move higher in the US dollar index comes primarily at the expense of the euro, which is trading at the lowest level vs the USD since the middle of 2017. The 1.05 level seems to be the obvious next stop.