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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.


US dollar futures (@DX) near support but not taking off despite higher Treasury yields.

As you'll notice below, the current projection is for wave "c" of the "abc" downside correction to take the DXY down to around 80.51. Maybe the currency players have been more accurate in their economic forecasting than the bond markets – as would seem to be the case based on recent DX trading action and the recent flow of data.

Once the projected support level is tested, I am currently calling for a healthy rally in the DX futures to occur which should take prices up to the 85-88 area. Any break / close below 80.50, though, and my bullish call will need to be re-evaluated.

Euro futures still stuck in a bearish setup.

The euro futures (@EC) still are threatening to follow through on a "head and shoulders" topping formation. I've been pointing this pattern out to everyone since March, but as long as the shoulder line shown on the chart is not violated (at around 1.3418), this bearish pattern could easily still play out all the way down to 1.24-1.25.

Yen futures painting a different picture than the euro.

While the euro sets up weak currently, the Japanese yen futures (@JY) are doing the opposite – at least for the short-term. My read on JY is that it is in the early stages of wave "v" higher with an ultimate upside target of 1.0762 at best and 1.04 at worst (from 1.0171 currently).

Will a higher yen and higher dollar mean the safety trade is going to be back "on" or will the higher yen and lower euro cancel each other out in terms of their effects on the DXY? Only time will tell.

Aussie dollar futures are reflective of a nasty situation in Australia – and China.

The Australian dollar futures (@AD) appear to be in the early stages of wave "iii of C" lower with lots of room to fall before this macro move is over. The recent jump in the Aussie Dollar – as mentioned in my article here on Friday – may have been a case of misplaced hope at best and outright deception by the Chinese government at worst.

The Australian economy, according to Aussie political and economic leadership, has to re-invent itself so that it is not so reliant on natural resource exports to China for its growth and prosperity. That type of secular shift does not occur overnight and may actually require the Reserve Bank of Australia to keep the ailing patient alive while this necessary reconstruction goes on.

The chart of the Aussie dollar futures is reflective of the current and developing situation in that country. The short-term targets for the AD are down at the 85-86 range from just above 0.9030 currently. However, if the wave count on the chart is accurate – and there is no guarantee it is – the long-term target for AD is all the way down in the 70s.

  • A little higher Treasury yields are possible and then a modest correction should occur.
  • Meanwhile the US dollar should find a floor at right around 80.51. However, the question is how much of a rally will occur – especially given the mixed messages / setups in the euro (bearish setup) and the Yen (bullish short-term setup).
  • Meanwhile, based on the charts of EMB and the Aussie dollar, the hope that emerging markets – especially China – will be rebounding in a big way may be misplaced.
What to do here?
  • Perhaps look to accumulate small to mid-cap US stocks based on the prospects of a rising dollar and persistently high interest rates. Save cash to buy iShares Russell 2000 Index ETF (NYSEARCA:IWM), iShares Russell Midcap Index Fund ETF (NYSEARCA:IWR), and iShares Russell Microcap Index ETF (NYSEARCA:IWC) (and the like) on September / October weakness.
  • I'd be avoiding international equities for now based on that same thesis. Consider selling or hedging iShares MSCI EAFE Index Fund ETF (NYSEARCA:EFA) / iShares MSCI Emerging Markets Indx ETF (NYSEARCA:EEM) and the like.
  • The only two international currencies I would be long are the greenback (intermediate to long-term) and the yen (for the short-term). Consider buying ProShares UltraShort Euro ETF (NYSEARCA:EUO), PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP), CurrencyShares Japanese Yen Trust (NYSEARCA:FXY).
  • I would be looking to lighten up on the precious metals as the DX futures approach their downside target – if not right now. If and when the DXY rips higher, it can't be good for the metals.
  • Watch your exposure to levered risk right now and just be looking to be opportunistic with adding equity exposure in September and October.
Twitter: @seachangereport

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