The FX Trader: USD bears in the driver’s seat, looking for more downside.

The latest

The US dollar has recently “underperformed” relative to the news flow out of the Iran war and the spike in oil prices. As the war broke out, speculative positioning in the US dollar was coming off the most bearish levels in more than a decade in January, according to at least one Bank of America survey. Any massive market disruption brings position squaring. And in the early days and weeks of the Iran war saw the USD functioning as a “safe haven”, in part due to the US dollar’s traditional safe haven role, but certainly as well as a function of position-squaring due to that large speculative position.

But over the last several days, the correlation between the US dollar and the oil price has faded considerably. Yes, the US dollar woke up Monday this week at higher levels due to the spike in oil prices after the US-Iran talks in Islamabad, but the move only looked piecemeal and half-hearted – clearer in USDJPY but less so in AUDUSD and EURUSD. It feels at this point like from here that bad news from the Persian Gulf might only see a bit of USD resilience rather than robust USD strength unless global markets lurch into a nose dive, while the US dollar is ready to fall sharply if the news flow continues to support a lower crude oil price and steady to improving global risk sentiment.

In the meantime, that huge headwind to US dollar bears – that speculative USD short position – has become a tailwind as we have now seen a large USD long position having been built up. The US COT report of futures positioning (as of last Tuesday, reported last Friday) saw the first EURUSD overall short position since early 2025, the largest USDJPY long position since the summer of 2024 (just before the meltdown in the JPY carry trade) and a still-significant sterling short.

Speaking of sentiment, the Australian NAB Business survey for March was released early Tuesday and probably helped to hold back the Aussie in the crosses. The NAB survey saw the  “Conditions” portion holding steady relative to February, while the Confidence portion of the survey suffered its worst collapse since the outbreak of the Covid pandemic, dropping to -29 from a reading of -1 in February. This will prove a temporary distraction if fuel supply disruptions are seen clearing quickly, while copper and precious metals prices are rallying again, which are supportive for AUD. Still, AUDNZD may have rounded a corner after topping out recently at 1.2200+ - watching the 1.2000 level there. As for AUDUSD, Monday’s candlestick emphasized the importance of the 0.7000 area support.

Chart focus: USDJPY
The JPY has been weak across the board recently, as the Bank of Japan is seen as terminally unresponsive to inflation risks and as Japan is one of the most vulnerable major economies to disruptions of oil flows from the Persian Gulf. At the same time, global risk sentiment has rebounded sharply over the last week, a boost to JPY carry trades. Still, a further retreat in oil prices and global bond yields from here might offer the JPY some support, helping Japan’s ministry of finance to avoid having to roll out the verbal, and perhaps actual, intervention artillery if 160.00 were threatened once again. We have also rolled into a new financial year in Japan (financial years end March 31 there), which could open the door to new developments. There’s not much in the technical picture to argue for bears to get involved here besides perhaps some momentum divergence (recently higher USDJPY prices with momentum indicators not at new highs). The bears will need a breakdown through 158.00 for any kind of initial confirmation, while the structural levels that are more important are more like 155.30 and then supportive developments from the Ichimoku chart. Ichimoku technicals did a good job of pointing to the end of the bearish hopes the last time around when the price action that initially raised bearish hopes (when the price punched down through the “cloud” and the “lagging span” indicator punched down through the price bars) in Jan-Feb then dashed them just a couple of weeks later by reversing aggressively.