Currency Charts Net Bullish After Intervention by Global Central Bankers

By Tim Thielen  DEC 27, 2012 9:15 AM

It's always a good idea to try to understand what the puppet masters wishes are. In this case the puppet masters in question are the US Fed and the Bank of Japan.

 


MINYANVILLE ORIGINAL The US Fed and the Bank of Japan have come out recently and told everyone that they need to do more to prevent problematic scenarios from coming to fruition. You would think that the results would be stronger euro, stronger Aussie dollar, weaker US dollar, and weaker Japanese yen. While some of that is playing out as it should, the Aussie dollar / US dollar cross is not falling in line. The weekly and monthly closes that will occur over the next four sessions will tell me a great deal about the future direction of things.

Let’s take a look at the charts to see what messages are being sent by the markets.

CURRENCIES

The EURUSD is following through to the upside this week (so far); there should be plenty of upside left.


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I highlighted last week the success that the euro / US dollar (EURUSD) bulls were having in terms of breaking out above short-term resistance (at 1.31716).  So far this week, it’s been more upside action in the euro!

It looks to me like the EURUSD is in the midst of the “c” wave of an “abc” correction to the upside. The “correction resistance” now looks to be at around 1.36294 to 1.38192 (depending on which pivots – intraday or closing – we use for the “abc” formation). Even at the lower edge of that resistance range, the rest of this trade offers over 4,000 pips of upside potential for the bulls. Size your position wisely, though, as there could be sharp, short-term downside moves on the way up to that target range (and you wouldn’t want to get shaken out of the trade prematurely).

The EURJPY has got a chance to break out to the upside this week – which would be a good sign for risk bulls!


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Just as with the EURUSD, the euro / Japanese yen cross (EURJPY) has a chance to continue higher. I note that it "has a chance" to do so because it has yet to conquer resistance on a weekly closing basis. That could change on Friday as long as EURJPY holds up above 111.428 into the weekend.  Also, I’m not as clear or sure on the wave count on this chart as I am with the EURUSD’s chart. There are a couple of different possibilities that exist in terms of counts on this chart, one of which could come to fruition even if 111.428 is broken.  So, on Friday, we can give the edge to the EURJPY bulls. However, I’ll be doing so with a watchful eye on this cross to see if there’s upside follow through in the coming weeks.

So far, the macro edge has to go to the bulls based on the EURUSD and EURJPY crosses.   

The long EURGBP trade mentioned here recently seems to be working out!  Is there more to go or take profits?

Before I move on to the Aussie crosses, I wanted to check in on the bullish call I had on the EURGBP in recent articles. As you can see on the chart below, it’s “so far, so good.” The EURGBP broke out above the 0.81641 horizontal line resistance level to set a new short-term high. This bullish behavior confirms for me that the cross is headed up to at least the 0.83373 level before any major selling pressure should occur.  It’s not as attractive an entry point here at 0.82012 as it was on the recent pullback to 0.805, but it’s still pretty nice for the bulls.


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The AUDUSD is in serious breakdown mode after failing to break out to the upside.

Now, we move on to the Aussie currency crosses. Are they displaying the same bullish patterns as the euro crosses? 

The chart below of the Aussie dollar / US dollar cross (AUDUSD) looks downright ugly and answers the previous question with a resounding “No!” The AUDUSD has been highlighted here recently as “almost” breaking out or being “on the verge” of a nice upside run. As we learn through experience in these situations, it’s always best to wait for the breakout to occur and then buy on a pullback to the new support. In this case, that type of patience would have saved you some money. 

The AUDUSD obviously failed to hold the one-day breakout attempt in the middle of December. Since then, it has been nothing but ugly downside trading in the cross. Now, the AUDUSD has convincingly broken below the lower edge of the long-term pennant formation that we were monitoring. 

So, let’s assume now that the AUDUSD is in “sell the rip” mode. In this case, I would be looking to sell any rally attempts up to the broken uptrend line (blue). Such a rally attempt might terminate at around 1.05 based on what I’m seeing on this chart. 


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Where might it go on the downside once you enter that trade?  Let’s look at the next chart for answers.  The chart below shows the same AUDUSD daily chart, but this time with Fibonacci extension lines that can help show us the potential stopping points on the downside trade. Assuming the AUDUSD is in a wave ((iii)) lower currently, the two most likely downside targets are the 138.2% and 161.8% Fibonacci price extension lines at 0.99665 and 0.98610 respectively.  If, on the other hand, the wave count is off and this is merely a correction lower instead of a primary move lower, the 100% Fibonacci projection line at 1.01374 would be the downside target (“correction support”). So, from an entry at around 1.05 (for those willing to wait), even the “correction support” level would offer over 3,500 pips of potential for your trading pleasure. 


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The AUDJPY has got a chance to break out to the upside – a symptom of Aussie dollar strength or yen weakness?

So, the Aussie dollar’s weak, right?  Not so fast!  Look at the chart below of the Aussie dollar / Japanese yen currency cross (AUDJPY).  It’s not rolling over (yet), it is on the verge of closing the week / month out above key resistance at 88.627.  It is currently trading at 88.745 – so the issue is still in doubt obviously.  A breakout here would make sense from the standpoint that the Japanese are trying to force the Yen lower (more on that below).  However, can it be only because of that? What about bullish / dovish murmurings out of China? What about global economic recovery and the subsequent increase in demand for commodities? Well, the bearish AUDUSD chart above is throwing a curve ball for us analysts for now.  We’ll have to wait to see (at the end of the week and on Monday) which chart is telling the truth – the AUDUSD or the AUDJPY – in terms of the strength of the Aussie.


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Remember what the Japanese are trying to do – weaken the yen to boost their economy.

As I mentioned above in the AUDJPY section, the Japanese are clearly trying to hold down their currency in an effort to boost exports, increase tourism and boost their economy. The chart below of the US dollar / Japanese yen cross (USDJPY) and the iShares Japan ETF (NYSEARCA:EWJ) was shown here weeks ago. At the time, I concluded that it would be a very good idea to put on long trades in the USDJPY and the EWJ as the Japanese didn’t seem to show any signs of letting their foot off the gas pedal. It was obvious to me that the Bank of Japan wants the yen lower and their markets higher. 

The USDJPY and the EWJ have made nice upside progress since that call was made. Now, the USDJPY is continuing to work toward a test of the very long-term downtrend line at around 88.5 (roughly 3,000 pips from current levels). The EWJ is also turning higher and has a lot of work to do to turn its chart long-term bullish (although, I am long of EWJ for client accounts currently with an upside target of 10.50 initially and > 12.00 long-term). 

So, take from the EURJPY, the AUDJPY, and the USDJPY the obvious conclusions that the yen is going to remain under pressure until the BoJ gets the economic growth it wants. Also, take the set-ups outlined as nice opportunities for short to intermediate-term profits.   


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BONDS

Treasury yields falling after the failure of “Plan B” for the fiscal cliff – no technical damage done yet.

I’ll keep it brief in the discussion on bonds this week (again) due to the interesting happenings in currency land. The yield on the 10-year US Treasury Note has been coming down over the last several days in reaction to the fiscal cliff headlines. No technical damage has been done yet and there’s been no change to the wave count I had previously laid out for you. This current pullback in rates should have a limit to the downside of around 1.693 (on a daily closing basis). Any close below that will force me back to the drawing board in terms of the wave count. Unless and until that happens, though, my call for a move higher in interest rates to around 2% on the 10-year T-Note remains intact. 


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OVERALL

I would have to say that things are a bit more bullish in the very short-term. However, a failure by the EURJPY or the AUDJPY to hold their breakouts would be concerning for the bulls. The bearish chart of the AUDUSD is already a yellow flag for this analyst. However, the bulls still have the edge for now. 

I would urge everyone not to over-commit in either direction right here. Wait to see how the week / month / year closes out (and even the first few days of 2013) before jumping in on one side of the “risk on / risk off” trade with both feet.

Twitter: @tttechnalytics

No positions in stocks mentioned.

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