Flows in Currency and Bond Markets Moving Into Riskier Assets

By Tim Thielen  JAN 16, 2013 4:10 PM

No thanks to US earnings -- or to the flow of economic news from around the world -- the story coming from the fixed income and currency arenas is still very much net bullish.


Perhaps it’s the idea that bad news is good news in terms of economic data (meaning that traders like the idea of the global central banker cabal keeping their collective pedals to the metal). Whatever the reason, the flows in the currency and bond markets are (for the most part) clearly moving out of the safe-havens and into the riskier assets. Perfect examples of this are the rise in German bund yields and the buoyancy in the US Treasury yields (despite very “iffy” action in US stocks during this earnings season).  So, that’s the narrative up to this point.  Let’s take a look at the charts and data to see the subplots that are in the works.


Here’s the summary of the bond market technicals:

Emerging markets bonds have broken down below two key support levels.

The iShares Morgan Stanley USD Emerging Markets Bond ETF (NYSEARCA:EMB) is shown below. We can very clearly see the dual breakdown below both the 14-day moving average support line (bad) and the 100% price projection line or “correction support” (worse) last week. Since Friday, EMB has bounced, but it is still stuck below the 14-day moving average line. That is the first obstacle that EMB must overcome to regain its bullish technical posture. For now, and until the moving average resistance is re-conquered, I have to give this battle to the risk bears. 

As noted in the table above, fortunately for the risk bulls, every other “tell” we watch in the fixed income arena is sending a “risk on” message. 

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Here’s the summary of the major gauges of risk in the currency markets:


Sell the New Zealand dollar / US dollar (NZDUSD) currency cross.

Of the thirty or so currency pairs I follow regularly, the one that has a trade setting up (which doesn’t fly in the face of what I’m seeing in the currency futures markets) is the New Zealand dollar / US dollar cross (NZDUSD).  As the chart below shows, the NZDUSD ran up to resistance (in what looks like an “abc” or “zig zag” corrective pattern) at around 0.84534 and has started to back off.  I believe the peak that was just made (or that may be made shortly) is a wave “ii” top and that the next decent move will be a wave “iii” to the downside with a minimum target of 0.80904 (roughly 3,100 points of profit potential for sellers). 

I would be looking to fade any bounce to near the .84500 - .84789 range. Any sale made in NZDUSD should have a stop-loss triggered on any close above .84800 (roughly 723 pips of loss potential to the stop-loss trigger from current levels). Obviously, the closer you can get to the .84500 level, the better the reward to risk ratio will be on the trade. 

Click to enlarge

Despite the sloppy action in the equity markets recently, I am just not seeing any confluence of red flags or warning signals coming from the fixed income or currency markets at this point. The breakdown in EMB’s chart was a minor yellow flag, but the bearishness of that signal has yet to be confirmed by anything in either the bond or currency markets. Until I see more confirming evidence from these two “truth telling” marketplaces, I have to remain somewhat constructive on the prospects for the equity markets and for certain aspects of the commodities markets. 

Twitter: @seachangereport

No positions in stocks mentioned.

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