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Australia Bucks Global Easing Trend, Bond Markets Signal More Short-Term Upside for Risk Assets

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The Aussie Dollar continues to rip higher as expected and the message from our bond markets is a friendly one for risk assets in the very short term.

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The Royal Bank of Australia continues to be one of the "hawks" out there in terms of central banks. Contrast that with the Federal Reserve and/or the European Central Bank, and you'll see why the Aussie currency continues to trade bullishly. Meanwhile, our Fed continues to get what it wants – money moving out of the safety of Treasuries and the US dollar and into riskier assets. The question is, "How long will the global central bankers (ex-Australia) keep the pedal to the medal?"

MESSAGE OF THE MARKETS

CURRENCIES

The decision on the par of the Australian Central Bank to hold rates steady gave further fuel to the rally in the Aussie dollar.


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The Aussie dollar / Japanese yen (AUDJPY) has been on a nice run since late last year – and last night's rate decision out of Australia seems to have provided the boost that the AUDJPY needed to make new short-term highs.
  • As the wave count on the chart above suggests, this up move is either the c wave of an abc corrective move higher or the third wave (wave 3) of a primary move higher. Regardless, for those of you who trade the forex markets, even a small move up to 84.071 can offer a nice profit opportunity on the long side.
The upside is not limited to the Aussie / yen cross; witness the Aussie / US dollar cross below.


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The chart of the Aussie dollar / US dollar currency cross (AUDUSD) looks very similar to that of the AUDJPY. This one, too, has another 900 pips or so (as of 1:52 p.m. Tuesday) of upside before the first possible resistance level is tested.
  • Again, even if this is just a corrective move and that's all the upside there is left – it's still tradable in my eyes (as one who actually trades the forex markets).
  • However, as we can see, if this is (as I suspect) the third wave of a primary wave set higher, the targets are up at the 1.13 and 1.16 levels. That kind of upside potential makes both the AUDJPY and AUDUSD certainly worth taking a long-side shot.
  • In case you didn't know or have never traded the forex markets, PLEASE TAKE CARE TO BE AS PRECISE AS POSSIBLE WITH YOUR ENTRIES AND SIZE YOUR POSITIONS APPROPRIATELY SO THAT YOU DON'T GET WIPED OUT ON MARGIN DUE TO EVEN A MODEST PULLBACK PRIOR TO MORE UPSIDE.
How does the Aussie dollar look against the Canadian dollar? Very good!


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  • Instead of only looking at the "safe harbor" currencies (the US dollar and the Japanese yen), I wanted to see how the Aussie dollar was performing against another one of the "risk-on" currencies – the Canadian dollar.
  • The chart above clearly shows that the strength in the currency markets may be in the risk currencies in general, but that the Aussie obviously has the upper hand versus the Canadian dollar from a technical perspective.
  • The AUDCAD appears to be in wave iii of 3 higher – the latter stages of wave iii judging by the magnitude of the run that has taken place since the mid-December low (point ii).
  • If AUDCAD paused / consolidates here as part of wave iv, it would be a healthy pause that may allow bullish trades to be initiated (in anticipation of the wave v of 3 move which should take the cross up to at least the 1.09 level (over 2000 pips from the 2:31pm 2/7/12 level).
  • Overall, it's clear that global investors are favoring long investments in the Aussie currency. Stay long this currency versus the yen, the US dollar, and the Canadian dollar as long as the uptrend lines hold up.
BONDS

The 10-Year Treasury Note Yield continues to drift higher as the "risk trade" remains en vogue.


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  • The yield on the 10-Year US T-Note ($TNX.X) has been moving higher as wave (ii) of iii plays out.
  • My upside target for this move higher is 2.06% - although a move up to 2.094% is possible without invalidating this wave count.
  • This upside fits in well with the idea that there is a bit more upside left in the rally in risk assets. I will be keying off the action in the TNX carefully now that the 1340 level in the S&P has been approached. For informational purposes, my target for the S&P was not a specific target, but rather a target range of 1340 to 1360.
  • Now's the time to look for bearish divergences to occur as potential signals for a reversal in trend in the other asset classes.
Once this upside correction is over, the downside in rates should be quite substantial


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  • I'm sharing the chart above to remind everyone how far rates may still have to go before it's all said and done. My downside targets for wave 3 are all the way down at 1.443% and 1.321%.
Overall, the signs still point to a continuation of the recent rally. Be ever vigilant, however, for signs that the turn is about to occur – usually in the form of bearish divergences in the bond or curency markets.

Twitter: @tttechnalytics

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No positions in stocks mentioned.

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