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Risk On! Risk On! Bond and Currency Charts Are Not All in Agreement, Though


Are key bond and currency charts telling us to get involved on the long side without any cares? Not quite yet.


The Japanese just continue to lean all over their own currency. How long will this continue?

I have been happily correct in my bullish call on the US dollar / Japanese yen currency cross (USDJPY) and the iShares Japan ETF (NYSEARCA:EWJ). Is the trade getting "long in the tooth" yet? Normally, I'd say "yes" and be taking profits. But consider what's driving this action – the Bank of Japan and the powers that be in Japan wanting to re-flate their economy by whatever means necessary.

The chart below shows Japanese yen futures (@JY – the top graph) and the Nikkei 225 futures (@NK – bottom graph). To me, the Japanese government has made it clear that they've had about enough of this miserable economic / market condition in which they've been mired for all these years. If we are to believe that they will continue to keep their collective foot on the gas pedal until they achieve the desired result, then what's to stop them from driving the yen down to the 2007 levels (at roughly 0.8686 - from current levels of 1.149)? That's where the yen was trading when the Nikkei was up at 18,755 in 2007 – and we all know that the Nikkei was much, much higher than that in previous years / decades.

The big tell will be to see if yen futures violate the dual support (created by the 100% Fibonacci price projection line or "correction support" and the 38.2% Fibonacci retracement (of the 2007 – 2011 rally) line) at 1.14 or so. If that level is broken, the yen is going much, much lower over the course of the next few years. Until that happens, those trying to pile on to this bearish yen trade had better tread lightly because of the meaningful support nearby and the very oversold condition that exists in the short-term. As always, look to sell rips in a bearish chart situation – don't chase the dips!

Click to enlarge

Franc / krona cross was the truth teller once again over the last week or so.

I mentioned here recently that my proprietary indicator using the strength / weakness of the Swiss franc versus the Swedish krona had gone "bullish" for risk assets by breaking out above the downtrend line. Now that the breakout of the downtrend took place, we measure back from the recent low on December 14 to estimate when an explosive rally in stocks may ignite.

Based on the last bullish change in direction and corresponding ratio low (see the thick green vertical line in April 2012 in the chart below) and the subsequent low / take-off point for stocks – which were nineteen days apart – today should have been the beginning of a meaningful rally that lasts for more than a few days. If I were basing everything off of this indicator alone, I would be expecting a rally to last three-and-a-half to six months and to move 15% to 30%. But alas, I am not basing my decisions on one indicator alone (nor should you) – it's just something to keep filed away for future reference.

Click to enlarge

Overall for currencies:

Things are a bit less bullish here than in bonds or stocks. The EURUSD is seemingly trying to give back the morning's breakout extension and the AUDUSD is setting up perfectly for short-sellers. On the positive side of the ledger, the AUDJPY is looking good and the franc / krona indicator is singing a sweet song for the bulls. Overall, I'd say I'm reading currencies as positive for the risk bulls, but with one eye on some of the caution flags (which may be foretelling a short-term pullback in risk assets).


We all need to be watching the 1.847% level on the 10-Year Treasury yield closely today and over the next couple of sessions. A break above that level – especially on a weekly closing basis – could open the flood gates for more "risk on" action. I'm sure the action in the currencies will be corresponding well with whatever we're seeing in Treasuries – so keep an eye on these very large, very liquid, very truthful markets for clues on how stocks and commodities may be trading in the near future.

Twitter: @tttechnalytics

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