Where Are Global Players Going for Safety Now?

By Tim Thielen  OCT 03, 2012 3:25 PM

After an article about the Swedish krona becoming the new safe haven for global investors, it's time to let the charts confirm or deny that assertion.

 


MINYANVILLE ORIGINAL “Sweden’s krona is becoming the new Swiss franc for investors seeking higher interest rates in a growing economy that has a trade surplus and falling debt load.”  This was the lead into an article in Bloomberg on Monday.  I found the article interesting and decided to test their theory out in the charts to see if this is something I need to add to my daily checklist of market tells.  So, let’s see what the market is presenting in terms of confirming or denying evidence…

CURRENCIES

First, a little perspective…. How is the old safe-haven Swiss franc faring against the greenback?

Before I compare the Swiss franc versus the Swedish krona, I wanted to take a look at how the franc is holding up against the US dollar.  The reason is that the US Dollar Index has been a big part of the “risk off” trade over the last several years – especially relative to the euro.  But, does the greenback show up as safe harbor relative to the franc?  The chart below tells us that the franc is the preferred choice on a very macro perspective – and it has been so since the buck peaked out versus the franc in the early 2000’s.  So, is this a sign of US dollar weakness or franc strength?


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The Swedish krona is showing similar strength versus the greenback since 2009.

The monthly chart of the USDSEK below shows a similar top left to bottom right direction as the USDCHF chart above.  The wave counts may or may not be in sync, but the directional similarity is quite clear – meaning that the greenback has been in decline overall for a while now.


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The Swiss franc shows strength versus the Swedish krona recently – not vice versa (when using the US dollar as the base currency).
 
Contrary to what our friends at Bloomberg put forth in their article on Monday, the chart below suggests that the Swiss franc is showing good relative strength versus the Swedish krona when we use the US dollar as the base currency.  The top graph shows the USDCHF on a daily basis and highlights how the US Dollar has been declining since late July (risk on!).  The middle graph shows the USDSEK on a daily basis and shows that the US dollar started to decline against the Swedish krona a bit earlier than against the franc, but that the weakness recently has moderated.  That moderation in the USDSEK weakness has turned into an actual recent change in direction to the upside.  A change higher has occurred in USDCHF as well, but it has been much more subdued – giving the franc the edge recently versus the krona (right side of the chart – specifically the lower graph).  Just to be clear, when the lower graph is heading down, the franc is showing relative strength versus the krona (using the US dollar as the base currency).


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The same pattern is seen here when using the euro as the base currency.

I won’t add much to this except to note that this highlights that it’s not a dollar / euro thing, it’s a franc / krona thing that I’m highlighting here. 


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Does the franc’s relative strength versus the krona mean anything to average investors? It should!

So, how can the average investor use this information (which admittedly would appear to only be useful to currency players on the surface) to their advantage?  Well, when I added a chart of the S&P Depository Receipts (NYSEARCA:SPY) to the franc / krona / euro chart (see below), it reveals some potentially useful information. 

The red and green vertical lines indicate where the spread between the EURCHF and the EURSEK has made major turns.  When that spread ratio has turned lower (red lines - indicating relative franc strength versus the krona using the euro as the base), it appears to have preceded a top in the SPY by 60-90 days (see yellow circles).  When the ratio has turned higher (green lines – indicating relative franc weakness versus the krona using the euro as the base), it appears to have preceded a bottom in the SPY by 30-60 days. 

I will be the first to admit that this is a pretty small sample size (two years worth of data), but this could be something that you’d want to keep on the radar.  In particular, I would want to monitor it for divergences (spread declining even as SPY advances or spread rising even as SPY declines) which could help signal upcoming turns in the equity markets.

Is there anything that the chart is telling us regarding current market conditions?  As pointed out earlier in this piece and as it quite clear in the chart below, the franc is showing relative strength versus the krona and has been doing so since early August.  So, now we’re approximately 60 days from the start of that trend – which would put us in the beginning of the window for when we should be seeing some weakness in the equity markets sprouting up.  So, we have yet another piece of bearish evidence (on top of my recent highlighting of the weak Aussie currency and likely near-term downside in the euro) from the currency markets.


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Now, onto this week’s look at the bond markets…

BONDS

Treasury yields are range-bound for now.

Just a quick note on the yields on the 10-year Treasury Note ($TNX.X).  Support should come into play at 1.548% and things are shaping up for either a terrible breakdown there or a fairly sharp rise in rates (eclipsing the August – September highs easily).  I don’t think rates will just remain range-bound down here.


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Emerging market bonds holding above support thus far.

Here’s another quicky – this time on emerging markets bonds:  iShares JPMorgan USD Emerging Market Bond ETF (NYSEARCA:EMB) is trying to hold up above its moving average line.  It violated it (barely) late last week, but it quickly traded back above it and has held thus far.


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Junk bonds are breaking down, though.

The technical pictured for the SPDR Lehman High Yield Bond ETF (JNK) continues to deteriorate.  Now, on top of the trend line break that I highlighted last week, we have a failed test of that broken trend line (support turned into resistance).  If we see a breakdown below the horizontal line support at $39.85, it will be a confirmation of the bearishness developing for JNK.


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WRAPPING IT ALL UP       

So, if I take the new (albeit relatively untested) indicator of the Swiss franc / Swedish krona comparison along with the renewed weakness in the JNK, I might be inclined to but the bears’ costume on for this Halloween season.  However, with Helicopter Ben and his merry men from around the world, nothing technical can be viewed as a certainty.  It is merely information that can help keep things in context overall.   That context, however, is keeping me cautious even as stocks try for more upside.

Twitter: @tttechnalytics

No positions in stocks mentioned.

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