The Euro Jumps Aboard the Bull's Train, but the Aussie Dollar Is Being a Wet Blanket

By Tim Thielen  DEC 20, 2012 10:36 AM

The euro-US dollar cross was finally able to conquer its short-term resistance over the last few days. But that's not the end of the story.


MINYANVILLE ORIGINAL Since my last piece for Minyanville, we’ve seen the S&P (INDEXSP:.INX) and Nasdaq (INDEXNASDAQ:.IXIC) each take out their key short-term resistance levels on a daily closing basis. We’ve seen the yield on the 10-Year US Treasury Note blow through its short-term “correction resistance” level like a hot knife through butter. Now, we’ve seen the EURUSD take out its short-term key resistance level as well. 

All of those occurrences are nice wins for the bulls. However, if risk assets are really telling us the global economy is on the way up, shouldn’t a commodity-centric currency like the Aussie dollar be exploding through resistance as well? What about emerging market bonds – shouldn’t they be remaining as buoyant as they’ve been during the market’s rebound over the last 30 days? What about the Swiss franc – which some are saying is the global safe harbor currency right now – shouldn’t it be weakening as money flows out of safety? The answer to those questions is “Yes,” but the action in those specific instances is painting a picture of non-confirmation / bearishness at this point in time.

Let’s go to the charts to review the evidence...


The EURUSD finally broke out above short-term resistance!  It’s still not a bull market for the cross, though.

The EURUSD managed to take out the horizontal line resistance at 1.31716 with which it had been struggling for the last month or so.  Assuming that breakout holds into the weekend, I think we can safely say the cross is likely headed up to the 100% Fibonacci price projection line (a.k.a., “correction resistance”) at 1.36294 – over 4,000 pips higher than Thursday’s levels. If you plot the Fibonacci lines using the slightly more optimistic pivot points, the 100% “correction resistance” line would come in at 1.38295 – around 6,000 pips higher than Thursday’s levels. Either way, it appears to be a nice long-side trade in the EURUSD – assuming, of course, that the breakout above 1.31716 holds into the weekend.

Such upside in the EURUSD would almost certainly be a tailwind for other risk assets around the globe like stocks and certain “risk on” type of commodities like copper and perhaps crude oil.

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The Aussie dollar is not (yet) confirming the bullish action in the EURUSD.

So, with the EURUSD breaking out above short-term resistance, the bulls have the “all clear,” right?  Well, there are some concerns and questions being generated by the very recent action in the Aussie dollar currency crosses. 

The first one we will look at today is the Aussie dollar / US dollar cross (AUDUSD) – see the first chart below. Notice the very clear rejection at the red downtrend line (the upper edge of a longer-term pennant formation). Any trader or experienced investor will tell you to wait for a break of the pennant formation and then wait further for a re-test of that broken trend line before pulling the trigger on a new trade. We did get a daily close above the red downtrend line, but that was a very minor break above resistance and it was quickly given back. Now, the black candles are showing up once again and a test of the dark blue uptrend line seems to be in the cards. Again – wait for the breakout or breakdown to occur and then wait for the re-test to occur before getting involved in a trade.

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The second Aussie chart to watch is the Aussie dollar / Japanese yen cross (AUDJPY – shown below).  This cross is at critical “correction” resistance right here and right now.  On a daily chart (not shown here), the AUDJPY already has closed above both the 100% Fibonacci projection line (for wave “c & ii”) at 88.516 and the horizontal line resistance (created by the intraday high for wave “c & 2”) at 88.627.  What I’ve learned over time in studying the Aussie currencies is that it’s the weekly charts that really matter – not so much the daily charts. Some would grouse about not being Johnny on the Spot right when breakouts occur and that you’re missing some of the move by waiting for confirmation from the weekly charts. However, I would say that if you’re trading for such small moves that missing out on a few hundred pips is a deal-breaker for you, then you might be headed down the wrong path.  In currencies, you will almost certainly find that the big money is made by playing for the big macro moves – not the day to day gyrations. If there’s going to be a 3,000 to 5,000 pip move, does it kill me to miss 500 pips while waiting for weekly closes to confirm a technical break? Not really – there’s still plenty of money to be made. 

Anyway, as we head into Friday’s close, it will be interesting to see if the Aussie dollar can get its act together and stage breakout rallies in both the AUDUSD and AUDJPY.  If they occur, the risk bulls will really be holding all the cards. If they don’t come to fruition, the bears out there may feel emboldened. 

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Back to the euro – can the EURJPY break out above key resistance as well (especially on a weekly basis)?

I noticed in my chart scans that the euro / Japanese yen currency cross (EURJPY) – which for years has been a favorite of intermarket technicians as a gauge for the global appetite for risk – is also on the verge of a fairly significant technical breakout. 

This time, instead of horizontal line resistance, the EURJPY is working to close the week out above “correction resistance” at the 100% Fibonacci projection line (for wave “c & (ii)”) at 111.248.  As of 11:17 p.m. on Wednesday night, it was trading at 111.432.  Again, the weekly charts can sometimes “be more truthful” than those tricky daily charts. In this case, a weekly close above 111.248 would open up potential upside to the next clear resistance at 114.754 (around 3,500 pips above current levels).  On the other hand, a failure to hold this breakout – and a subsequent reversal lower – could lead to a massive move lower in the EURJPY (perhaps all the way down to new all-time lows below 95).  So, watch this cross carefully as we head into the weekend!

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The franc / krona indicator is still working to break out above a downtrend line of its own.

My “proprietary” indicator using the spread ratio of the EURCHF versus the EURSEK – which basically shows the relative strength or weakness of the Swiss franc versus the Swedish krona – is still indicating relative demand for the Swiss franc – not a great sign for risk assets.  I will note, however, that the ratio is right at the downtrend line resistance once again.  Maybe this time will bring a change in trend. 

For those that don’t know, the Swiss franc is (along with the US dollar and Japanese yen) a well-known “safe harbor” currency.  With the US and Japan seemingly in a death race to see who can hit rock bottom with their currency first (only partially joking there), the Swiss franc pretty much stands alone as the world’s safe harbor currency (for now). When the spread ratio (top graph on the chart below) is falling, it indicates franc strength (theoretically a bearish leading indicator for stocks). When the spread ratio is rising or is in an uptrend, it indicates relative weakness in the franc (theoretically a bullish leading indicator for stocks).

So, this is yet another currency chart to be watching as we head into the weekend and the end of the month and year. A breakout above the downtrend line will at least turn the chart from bearish to neutral for risk assets. Once that occurs, we can then look for a series of higher lows in the ratio to develop (which would turn the chart bullish for risk assets).

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Conclusions from currency land:

If we can get the upside breakouts to occur or hold into the weekend for the euro and Aussie currency crosses, it would likely add more fuel to the fire for risk bulls. If we don’t get these breakouts to occur or hold, however, all of the recent upside in stocks and other risk assets may have just been luring bullish investors in prior to a big fall in prices. I cannot urge readers enough to pay close attention to the action in currencies in addition to stock prices. The currencies tend to be the truth tellers for the intermediate to long-term prospects for risk assets – not stocks.

The yield on the 10-Year US Treasury Note is breaking out above short-term resistance!

For months now, I’ve been pointing to the potential for rates to rise up to at least 2% on the 10-year Treasury even if this move is just an upside correction. For weeks and months, I was frustrated by the inability for the TNX to get any traction to the upside. Finally, however, we are finally seeing some serious movement to the upside in rates – enough so that resistance levels are starting to fall by the wayside. 

Over the last two sessions in particular, the 10-year yield has muscled its way through the short-term downtrend line as well as short-term “correction resistance” (see green Fibonacci lines) at 1.808%. At this point, I would expect to see a bit of a pause or consolidation before even more upside takes place.  More upside for rates in the short to intermediate-term would almost certainly be accompanied by higher prices in risk assets.    

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Emerging markets bonds are breaking support?

If the global economy is really improving, we absolutely should not only see interest rates moving higher, but also other risk “tells” like the iShares JPMorgan US Dollar Emerging Market Bond ETF (NYSEARCA:EMB). The reality, however, is that EMB is breaking and possibly closing below its reliable 14-day moving average line right now.  If the weekly close in EMB is below support on Friday’s close, I wouldn’t imagine it would be that well received by risk bulls.

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Conclusions from bond land:

It’s a mixed bag in bonds.  First, we have the rising yields on Treasuries – which is bullish for risk assets. On the other hand, what’s the EMB doing floundering around below its key support / resistance line? The action in junk bonds is still pretty benign, so we have to remain in split-decision mode in terms of “bullish” or “bearish” messages being sent to us from bonds. 


As I noted throughout this report, while it’s great to see the euro / US dollar breaking resistance – we must remember that it is short-term resistance that it’s conquering and that the overall chart for EURUSD remains in fairly bearish.  Couple that dynamic with the other mixed messages we’re getting from both currencies and bonds and you get a pretty compelling argument to remain invested in risk assets, but with one foot out the door.   

Twitter: @tttechnalytics

No positions in stocks mentioned.

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