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Rate and Currency Charts Are Sending Mixed Messages


The US dollar and euro may be at turning points while the yen moves countertrend, and the Aussie dollar is being whipped around by fantasy vs. reality.

As I pointed out in my article Fed in a Box -- Right Along With Its Global Central Banker Cousins late Friday, we've seen interest rates and the DXY diverge recently – forcing us all to wonder whether the truth about the economy rests with currencies or bond yields. Based on the recent flow of economic data, it appears that so far there is a more accurate reflection of reality in the stubbornly low DXY rather than the higher rates.

As a result of the strange combination of buoyant yields and sub-par economic data recently here in the US, equities have been trading indecisively, but slightly lower. Meanwhile, commodities, and specifically the precious metals have been keying off of the movements of the dollar rather than rates. So, what does the future hold for rates and currencies, and how might global equities and the metals react? Let's go to the charts.


10-year yields stubbornly high – reflecting economic realities or a trading phenomenon?

The yield on the 10-year Treasury Note is pulling back off last Thursday's high of 2.92%, but nothing has happened technically to disturb the overall upward bias in rates. As long as 2.723% holds as support, this will remain the case in the short-term. My call is for a wave "iii" move up to 3.019% - 3.021% to occur before pulling back once again for wave "iv" of this five wave sequence. I'll deal with projecting the magnitude of this pullback if and when the upside yield target is met.

High Yield Bonds

The chart below of the SPDR Barclays High Yield ETF (NYSEARCA:JNK) is not the type of picture we should be seeing if the higher Treasury rates were accurately reflecting a growing / improving economy. This chart is neutral at best / bearish at worst. Based on JNK being in what appears to be a macro "abc" correction lower, the downside for JNK should continue for another 5%-6% lower – which translated means short-term bearish and intermediate-term neutral at best.

Emerging markets bonds just as bad as the JNK chart above.

The iShares JPM US Dollar Emerging Markets Bond ETF (NYSEARCA:EMB) is shown below going back to the late 2011 sell-off. Like JNK, this bearish picture is not what the bulls want to see right now. It looks to this technician like a test of the June lows is coming – which is only a couple of percent lower than current levels. Unfortunately for the macro bulls, any rally that should follow the test of the lows will likely be corrective in nature. That is not to say EMB won't rally significantly off the coming test of the lows – it's just that the rally will be some kind of correction of the 2013 decline.

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No positions in stocks mentioned.

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