Risk Currencies Are 'ThisClose' to Bond's Bullishness

By Tim Thielen  DEC 06, 2012 9:14 AM

Forex is still working hard to join the unabashedly bullish bond cabal and to force risk bears to run for cover.


MINYANVILLE ORIGINAL Currency crosses such as the euro / US dollar have rallied beautifully for the last few months.  The damage to the charts that was done prior to the rally, however, left a lot of work to do in order for the bulls to claim victory.  The EURUSD and the AUDUSD are both trading right below important thresholds as I type this article.  If they can conquer those resistance levels, it may force skeptical bears to run for cover and fuel more of an equity rally.


The Japanese are trying to weaken their currency again to boost their economy and markets.

Before I get into my updates on the critical currency and fixed income tells that I cover here weekly, I wanted to take a look at a long-term chart of the US dollar / Japanese yen currency cross to see if it could tell me anything about the current and future environment for Japanese stocks.  I have been tracking the iShares Japan ETF (NYSEARCA:EWJ) for a while now.  Recently, I have noticed that EWJ was just on the brink of breaking out above an intermediate-term downtrend line.  The natural assumption is that it is doing so because the Japanese are doing everything they can to devalue the yen to boost exports and help their economy out.  What does the long-term chart below tell us?

Well, the first thing I notice is that until around 2005, the Japanese equity market would typically rally only when the yen was strong against the US dollar.  However, ever from the very end of 2004 and lasting until mid-2007, Japanese stocks rallied while the yen was falling in value against the greenback.  Since mid-2007, we have seen a long-term trend of yen strength against the dollar.  During that time, we have seen a generally weak EWJ – certainly relatively weak versus other global equity markets.  As a result of this, the Bank of Japan is apparently working hard behind the scenes and in the open marketplace to weigh down the yen.

So, we can see at the very right edge of the chart below a turn higher in the USDJPY (showing yen weakness).  Are we seeing the expected accompanying strength in the EWJ?  As I noted before, despite a nice run to the upside recently, we have yet to see a bullish breakout in the EWJ above its intermediate-term downtrend line.  The good news for EWJ bulls is that it is very, very close to doing so. If such a breakout occurs, it opens room for more upside to well above $12 (nice upside potential from the current level of around $9.30). 

So, let’s stay tuned to EWJ to see if it can take out $9.32 on a closing basis (and preferably a weekly closing basis).  For currency players, the USDJPY can rally all the way up to around 86.50 (about 4,000 pips from current levels) before even testing its long-term downtrend line.  So, whether you’re going long EWJ or long the USDJPY (betting against the yen), there are some nice trade set-ups coming from the Land of the Rising Sun.

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The EURUSD running into resistance after trading stronger than expected since July.

The euro / US dollar currency cross (EURUSD) has continued to impress recently.  I personally was looking for more of a pullback as part of wave b – perhaps down to the 1.225 area.  The EURUSD has not yet cooperated with my call for more downside. 

The reason I was calling for more downside to the 1.225 area was so that we could then see a “c” wave higher (that would complete wave (ii)) that would top out at 1.34855.  The likelihood of the downside that ended on 11/16 being wave “b” and the upside we’ve seen since being wave “c” is very low.  We will either see more downside to complete the wave “b” or my count is off and the EURUSD still have plenty of room on the upside.  What will tell me that the count is off?  At this point, only a close above 1.31386 will completely invalidate the wave count on the chart.  As long as that resistance level holds up, then we can still see the rest of the wave “b” play out.     

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The AUDUSD making another attempt at breaking out of wedge pattern to the upside.

Just as with the EURUSD, the Aussie dollar / US dollar currency cross (AUDUSD) has been showing good strength of late – but is running right into important technical resistance.  This resistance comes in the form of the upper edge of the pennant pattern that I have mentioned here previously.  AUDUSD failed to break through that downtrend line on the first attempt last week.  Now, it is giving it another try.  The bulls will be able to claim success on this one if the AUDUSD can manage to close above 1.04840. 

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The AUDJPY pausing after a nice run – maybe a bit more upside until major resistance is hit.

Just to get away from the US dollar based crosses for a moment – the Aussie dollar / Japanese Yen cross (AUDJPY) has been on a short-term bullish run since early October.  This cross is used by many analysts as a good gauge of the global appetite for risk.  Notice the especially shallow pullback in early to mid-November which is when the equity markets were going through their recent pullback.  This relative strength acted as a bullish tell – if you were paying attention at the time. 

Since the most recent bottom, the AUDJPY rallied powerfully until the end of November.  It has been basically consolidating since then – leading to what I believe will be one more little (relative to the recent move higher) rally to the upside.  The minimum upside target for the coming move will be 87.159 – the 100% Fibonacci price projection line for wave “c & ii”.  If the wave “c & ii” resistance is broken on the upside, the door will swing open for even more upside action. 

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So, the message from currencies right now is that we’ve had a nice run in the “risk” currencies, but now they’re at some pretty major resistance levels.  Another thrust to the upside in the euro and the Aussie Dollar could do the trick for the bulls.  Until that occurs, though, we have to be on the alert for signs of a downside reversal and a resumption of bearish trends in the risk currencies. 


The yield on the 10-year US Treasury is slipping towards key support again – despite equity prices rising.

The equity markets have been on the rise, economic numbers (especially in the housing arena) have been benign if not bullish here in the US and there are some more hopeful signs coming from economically important countries like China.  So, why are Treasury yields falling – and nearing critical support?  Are Treasuries warning us of something ominous on the horizon?  Or are Benny and the Jets at the Fed simply trying to pour gasoline on the fire?  I’m not sure of the answer to that question yet.  But, I do know that any close below 1.547% will cause those short of bonds to cover their bets quickly. 

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That’s it for bonds today – I’m intentionally keeping the bonds section short today due to the Japan-related material in the currencies section.  The message from Treasuries is still somewhat unclear to me – only because of the outside intervention by the Feds.  If they weren’t involved and yields were acting as they are, I would be much more concerned about something scary lurking around the corner.  As things are, though, while I am cognizant of the possibility of bad news coming, I am taking the messages from the Treasury markets with a grain of salt until further notice.


With Treasury yields falling and the EURUSD and AUDUSD still having to conquer key resistance levels, I have to maintain a certain level of skepticism towards risk assets.  I’m happy to be long of special / specific situations like Mexican equities or even Japanese equities (pending the breakout being occurring and being confirmed).  However, wholesale, across-the-board buying of global equities is not something I’m engaged in right now.  
Twitter: @tttechnalytics

No positions in stocks mentioned.

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