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Commodity-Related Currencies Suggest Some Bonds, Currencies Finally Acting Bullish, but for How Long?

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The Aussie/Yen, the Euro/US Dollar, the yield on the 10-Year T-Note, and the iShares High Yield Bond ETF are all displaying bullish (for risk assets) behavior.

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Stocks and certain "risk" commodities have been on the rise for a while – even as the bond and currency markets were continuously sending contrary / bearish messages. Now, however, at least I can say that the bond and currency markets are participating in the bullish (for risk assets) activity – even if they're merely going along for the ride instead of leading.

MESSAGE OF THE MARKETS

BONDS

The yield on the 10-Year US Treasury Note has reached my upside target – assuming this is just an upside correction.


  • The yield on the 10-Year US Treasury Note ($TNX.X) has finally moved up to the 100% Fibonacci price projection line at 2.086%. It actually traded above the 2.086% level on an intraday basis but it backed off to finish below that level Monday.
  • If the wave count shown on the chart is correct, then the TNX just completed wave c & (ii) of iii with wave (iii) to commence shortly.
  • There may still be some more room for stocks on the upside. So, it will be very interesting to see if yields continue higher through the resistance level at 2.086% or if they will stall out here – creating yet another negative divergence in the bond market (while stocks rally).
  • So, where might rates go if they've topped out here? See below…
Here's where the 10-Year T-Note Yield should head now – again assuming the upside correction is over.


  • If the next move for TNX is wave (iii) of iii as stated above, the minimum downside target for rates will be 1.576% with more support just below that level at 1.493%.
  • Clearly, such a move lower in rates will occur only if we start to see some problems in the risk markets. So, perhaps we see a little more upside in the risk markets while bonds basically tread water below the resistance in yields (creating a negative divergence or non-confirmation by bonds).
  • Then, once the upside target for stocks (1340 – 1360 for the S&P according to my work) has been approached or touched, we might start to see a down move in risk assets and a move back to the downside in rates.
Junk bonds are finally acting the way one would expect in a bullish market condition.


  • I've been harping on the fact that neither the action in the Treasury market or the high yield bond market have been confirming the bullish activity in equities recently.
  • Well, now not only have we seen the Treasury yields start to move higher, but the iShares High Yield Bond ETF (JNK) has begun to make a move higher as well.
  • The upside is nice, but we cannot get too excited about either the move in Treasuries or in JNK yet. As mentioned above, the Treasuries tested resistance and failed there Monday. In the case of JNK, the chart clearly indicates that there's some more room to the upside before it even gets to its 100% Fibonacci price projection line at 39.67. That's not much room (1.5% or so), but it's upside nevertheless.
  • I'm still of the opinion that we'll likely see some stalling out in JNK as it approaches or tests the 38.67 resistance level. However, I'm not going to fight the market if JNK closes convincingly above that level or if the 10-Year T-Note yield closes above 2.086% (and neither should you).
CURRENCIES

The Aussie Dollar / Japanese Yen cross has rallied as expected and may have more to go on the upside after a brief correction.


  • The Aussie / Yen cross that I've been highlighting over the last couple of weeks has moved higher just as I thought it would. The AUDJPY has managed to climb all the way up to the 138.2% Fibonacci price projection line (the first likely resistance level for a third wave move) at 81.192.
  • Given the fact that this move is merely part of a larger upside correction – and given that correction's upside target is 82.734 (not that much higher than current levels) – I'm thinking we'll see the AUDJPY take a breather for a little bit as wave (iv) starts now and runs its course over the next several sessions.
  • Once this "flat" correction plays out, then we'll see another smaller shot higher as part of wave (v) and iii.
  • So, just as with stocks, there's some more room to the upside, but the big part of the upside move may have already taken place. There's more money to be made on the upside for AUDJPY, but it's not going to be as easy or as fast as with the wave (iii) that just occurred.
The Euro / US Dollar (EURUSD) is rallying in the short-term as well – giving more of a boost to an already overbought equity market.


  • For those folks who are watching the developments in Europe every day and trying to trade off of that news flow (not recommended by the way), we may see some more bullish action ahead.
  • The chart of the Euro / US Dollar cross (EURUSD) shown above indicates that the EURUSD is in the midst of wave c of ((ii)) which should take the cross all the way up to 1.32197 from current levels.
  • The confidence level on the upside target of approximately 1.32197 is increased in this case as that level roughly corresponds with the 38.2% Fibonacci retracement line for the down move that occurred from late October 2011 to mid-January 2012.
  • That pretty much matches up with the outlook for stocks (more upside likely / possible – although it's not much in percentage terms).
Overall, it's nice to see some bullish action in the bond and currency markets to go along with what we've been seeing from equities. However, the charts clearly show that there is critical resistance still to be conquered on the charts of the 10-Year Treasury Note, the JNK fund, the AUDJPY and the EURUSD. If one or more of those charts experience upside breakouts above their respective resistance levels, we would likely see even more wind in the bulls' sails. Just don't try to jump that breakout, though, as a failure at resistance on any of those charts could be a signal that things are going to turn back lower for all risk assets.

Twitter: @tttechnalytics

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No positions in stocks mentioned.

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