After a quick glance at the economic calendar Sunday night, one would have thought that it would be a relatively sleepy beginning to the week for currencies. The reality was far from that, thanks to a flurry of fundamental news around the globe.
First, there was a major election victory for the Abe regime in Japan. Abe came out Sunday and repeated that he would focus on fixing the world's third-biggest economy with his "Abenomics" mix of hyper-easy monetary policy, fiscal spending, and a growth strategy including reforms such as deregulation.
Second, there was a collective sigh of relief from European investors after the president of Portugal came out and backed the idea of keeping the current government in place until the end of the term. Concerns had been rising as a premature change there might have jeopardized Portugal’s bailout package.
Finally, there was a combination of the Detroit bankruptcy news and a New York Times investigative piece
Sunday that spurred concerns that Goldman Sachs
(NYSE:GS) and other US-based global investment banks may come under investigation in the near future due to legal, but manipulative business practices in the commodities space.
So that was the key news flow. The most important factor is not what the news is, but rather how the markets react to the news. One of the favorite set-ups for traders is to identify counterintuitive reactions to news flow. An example of this is when a beaten up stock reverses course and rallies in the face of bad news. As you will see below, the Japanese yen is showing us another example of counterintuitive reactions to news flow.
Let’s go to the charts.
Yen futures are on the rise despite mandate for Abenomics.
One would think the yen would come under pressure on the news of the election results out of Japan on Sunday. The reality Monday is the opposite of that, though. JY futures are, in fact, trading to the upside Monday – just like a weak stock rallying on bad news. Sometimes, such a rally is short-lived -- the proverbial "dead cat bounce." However, I’m of the opinion that the JY futures have a wave "C" rally up to just above 1.07 still to come. I’ve been waiting for a short-term wave "ii of C" bottom to be put in place. Friday’s low print and the subsequent rally today may be the upside turnaround for which I’ve been waiting.
The US dollar is on the verge of breaking below short-term support on the news flow.
Greenback futures (DX) are trading at 82.245, below the July 11 pivot low of 82.60. The move lower is certainly not a surprise given the news flow out of Detroit and surrounding some of our largest financial institutions. A close below the 82.60 level will open up the likelihood that we will see Treasury rates fall and the DX futures tumble down to my wave “C & 2” target of 80.531. What that will mean for stocks is not 100% clear given the very fluid nature of the intermarket relationships recently. However, I would be willing to bet that if the drop in DX futures is accompanied by a drop in Treasury yields, equities will be under pressure simultaneously. Given the fact that we’ve seen the S&P
(INDEXSP:.INX) futures reach my projected resistance range of 1,687 - 1,703 for this up move (wave “(iii)”), a pullback in stocks to go along with a move lower in rates and the DX futures seems to fit. Only time will tell, though.
The euro has more room to bounce if it can just close above short-term resistance.
The euro futures (EC) are catching a tailwind today thanks to the weak US dollar as well as the crisis-averting moves out of Portugal. Add to that the fact that there are more market pros and analysts coming out and calling for economic improvement on the continent and you have the positive reaction in EC futures we’ve seen recently and today.
Based on the wave count on the chart below, I can easily see the EC futures continuing to rally up to major “correction resistance” at 1.3342 from 1.3196 currently. First, though, EC will need to overcome horizontal line resistance at 1.3212 as well as a short-term overbought condition before it can proceed up to the higher target.
Obviously, the fact that I am calling the recent upside a correction means I am still a macro bear on the euro. My long-term downside targets for the EC futures are at 1.25 and points below. In the short term, though, the euro may continue higher, working with the yen strength to weigh down the greenback.
Overall for Today’s Analysis
As I mentioned earlier, I am expecting continued dollar weakness along with strength in the euro and the yen in the short term. While I am willing to predict a coincident drop in Treasury rates (and rise in bond prices) and a continued lift in currency-sensitive commodities like gold, silver, and copper, I’m not clear on what the intermarket relationship will be with stocks. Given where equities are on the chart and in their wave count, we may just see a sideways consolidation rather than any meaningful move lower. Given the next move for the S&P is a fourth wave, a consolidation would come as no surprise.
Based on the evidence at hand, I would be looking to own bonds, the euro, the yen, and precious metals while holding equities and selling the US dollar until short-term targets are hit (on the currency / futures chart especially). Rest assured, though, I will not be shy about booking profits if I get them once those targets are approached.
No positions in stocks mentioned.
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