So some of the pressure has been let out of the balloon – meaning the pressure (downward in the euro and in safe-harbor government yields, and upward in the US dollar and in riskier government yields) has abated in the short-term. The question now becomes whether enough pressure has been let out yet. Today’s charts give us some clues as the the possible answers to that question.
The euro / US dollar cross hit the first possible upside target, but that may not be the stopping point for this move
As I’ve been mentioning here over the last few weeks, the euro hit my projected price targets on the downside and then some. I called for a wave (ii) counter-trend rally / correction to commence at some point. Well, we finally got the catalyst for a rally last week courtesy of ECB President Mario Draghi.
Using Fibonacci retracement lines (retracement of wave (i)), we get our possible upside targets for wave (ii). The first of those targets – the 23.6% retracement level at 1.23824 – was already tested on the initial move off the lows. Given this is a wave (ii) correction, there is a pretty good likelihood that we’ll see more of a correction higher for this move (since second waves are typically relatively deep retracements of the preceding first waves). So, given that along with the potential for the central bankers to say or do just about anything to prop things up, I can absolutely see another shot to the upside that may bring the EURUSD up to the 38.2% retracement level at 1.25932. Risk bulls out there will love such a move – but we all must keep in mind that the intermediate to long-term outlook for the euro remains quite bleak. Don’t be shy about taking profits as some of the higher resistance levels in the EURUSD are tested.
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The other gauge of risk in the currency markets – the Aussie dollar / Japanese yen cross – is also painting a picture of short-term upside with intermediate-term weakness
I have not touched on the Aussie dollar / yen cross in quite a while as the markets seemed to have been completely focused on the happenings in Europe. In looking at the chart of the AUDJPY below, I get the same general impression as when I study the EURUSD. There could / should be a bit more upside in the short-term followed by another thrust to the downside.
In this case, the AUDJPY appears to be finishing up a macro wave iv higher, which should be followed by a wave v lower. The ceiling on this wave iv should be 83.243 (AUDJPY is trading at around 82.150 currently). The downside target for wave v of C should be down at around 72.50.
This clearly fits right in with the idea of a bit more of a correction (higher in the euro and lower in the US dollar) before the primary trends (lower in the euro and higher in the US dollar) take back over.
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Just as a reminder, here’s the daily chart of the US Dollar Index
The daily chart of the DXY is shown below. Here we can see that the 23.6% retracement level (retracement of wave (iii ) in the case of the DXY) of support has been tested. It is entirely possible for the DXY to hold support at that level, but I’m thinking there will be a bit more downside in the DXY before this correction is over. Look for a move to the 81.81 support level (the 38.2% retracement of wave (iii )) and then evaluate how everything’s looking at that point.
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Treasury rates have bounced a bit – if left to their own devices, they should continue higher.
With a full acknowledgement going to the potential actions of the Fed and the central bankers globally, I’m still calling for rates to move higher as the wave iv counter-trend rally continues. Right now, it’s hard for many to imagine, but the charts tell me that the yield on the 10-year US Treasury Note ($TNX.X) should rally to at least the 1.949% level. Given the obvious external influences, such a call seems far-fetched if not completely outrageous to many. However, I would point out that with so many leaning one way – including the powers that be – such moves in the other direction can easily take place if positions are reversed.
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Emerging markets bonds have been the big winner recently (outside of Treasuries)
The iShares JPMorgan Emerging Market Bond ETF
(EMB) is shown below (monthly basis going back to 2008). I’ve shown the daily chart of EMB before and the strong support provided by EMB’s 14-day moving average (which is very much still the case, by the way). However, when new highs are being set almost on a daily basis, we need to look at things a bit differently to establish just how high the security in question may go. This chart allows me to include the long-term wave count and do some extrapolating. As you can see, EMB appears to be in wave 5 higher of the longer-term sequence. Assuming wave 5 roughly matches wave 1 in magnitude, we can deduce that EMB should continue its rally all the way up to the 122.36 to 125.29 price range (from a current level of approximately 118.75). I’ve noted this before, but EMB’s chart is clearly in better shape than that of the iShares MSCI Emerging Markets Equity ETF
(EEM). I’d be staying with this trade until the projected resistance levels are tested. Enjoy collecting the 4.62% yield while you wait, by the way.
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With some initial technical levels being hit for this correction, it is entirely possible that the rally in risk could be over. However, given the likely wave counts on several of these charts, it seems more likely that there’s more to come (on the upside for risk / downside for safety) before this move is over.
Before I wrap up, here’s a check up on the key European sovereign debt yields:
Rates in the European sovereigns obviously came down since my last report (thanks, Mario and Angela!). The optimism will obviously be short-lived unless there’s some policy follow-through this week. Stay tuned!
That’s it for now! Have a great week!
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