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Bulls Are Enjoying Better Currency Action, but How Much More Upside Remains?

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A bullish Aussie dollar is always a good sign for risk bulls. Add that to the bullish (for risk) bond action and it's easy to see why there's been such positive price action in risk assets.

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MINYANVILLE ORIGINAL The Aussie currency crosses broke / are breaking above the short-term resistance levels outlined here in recent weeks. They still are not in "bull market" mode – as the charts in today's report will highlight. The Euro has yet to join the breakout party – but the (short-term) party isn't over yet. We ARE getting a bit of a warning sign from my Franc / Krona "tell", though. Meanwhile, bond-land messages remain short-term bullish for risk assets. We will cover all of these areas and more in today's report.

CURRENCIES

The EURUSD is still hasn't conquered short-term resistance despite bullishness elsewhere.

For weeks now, I've been pointing to the 1.31386 level on the euro / US dollar (EURUSD) currency cross chart. That level of resistance still remains intact – and until it is broken, I'm containing my enthusiasm toward the recent rally in risk assets. However, as the chart below shows, there is plenty of room to the upside for the cross if that pesky resistance level can be taken out. Using some Fibonacci calculations, the next range of resistance for the EURUSD could be up at 1.36294 to 1.38395 (see green lines on the chart) if the 1.31386 resistance level is taken out.
If it is not broken, however, my recent call for a wave "b" move lower (towards around 1.225) remains intact. Obviously, to get down to that level, the horizontal line support at 1.26605 (see green boxes) would have to fail.

The difference between upside to 1.38 and downside to 1.225 is huge – which is why the 1.31386 level is so critical to monitor.


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The AUDJPY took out short-term resistance, but may be about to run into a wall.

In recent reports, I had identified resistance for the Aussie dollar / Japanese yen (AUDJPY) currency cross at around 87.60. That level was easily taken out yesterday – which caused me to re-examine the chart of AUDJPY to see where things could go on the upside. In doing so, I discovered that there may yet be another key "correction" resistance level for the AUDJPY to try to conquer.

Notice on the chart below that if you use intra-day extremes for the June low, the August peak and the October low, that the 100% Fibonacci price extension line (aka "correction resistance") comes in at 88.516. Now, take a look at the upper left side of the chart where the intra-day peak for point "c & 2" comes in at 88.627. Assuming the June low was wave "i", the maximum upside for wave "c & ii" would be 88.627. With the Fibonacci projection for wave "c & ii" coming in below that, this wave count appears to still be safe. What it all means to you is that the recent rally in risk has been great, but there appears to be only a little room left for the AUDJPY (a key gauge for the global appetite for risk) before I would expect it to stall out and reverse course to the downside.

Of course, any break and close above the 88.627 level would open the flood gates for much more upside and would likely contribute to some major short-covering by those betting against the rally in risk globally.


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The AUDUSD still has multiple hurdles in front of it.

While the AUDJPY has taken out the previously identified resistance level at 87.6 (even though it now faces an even greater hurdle in the short-term), the Aussie dollar / US dollar cross (AUDUSD) has failed to make it over its intermediate-term downtrend line. The chart below clearly shows how that line is causing real problems for the AUDUSD. Notice also that there appears to be horizontal line resistance (see the light yellow boxes) coming into play right around current levels. IF, and that's a big "if", the AUDUSD can conquer the dual resistance at current levels, then I would think we would see it make its way up to the 100% Fibonacci price projection line at 1.08487 (from 1.055 or so currently). That's a nice upside trade for anyone who want to jump on for the rest of the ride – if the trend line and horizontal line resistance is taken out.

The fact that the AUDUSD is not even close (yet) to testing the March highs while the AUDJPY is ready to do so in short order illustrates how hell-bent the Japanese government is on weakening their currency to boost their economy (as I pointed out here last week). What it also illustrates is that unless we see the trend line broken, a turn back to the downside could be coming for risk assets.


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Revisiting a recent call: The EURGBP long trade recommendation appears set to take off.

Back on November 13, I highlighted the euro / British pound cross (EURGBP) as a potential long candidate (while it was still at .79926). Since then, it drifted a little lower to near what I thought should be support and has bounced nicely. The bounce took EURGBP up through the long-term downtrend line convincingly in late November / early December.

Since making a short-term peak in the first week in December, the cross has come down to re-test the broken downtrend line. So far, that support has held up perfectly and we've seen several days of upside. This cross may or may not come back to re-test that line again. If you can get it down there, great – do so. In case it does not come back in, one strategy may be to scale into the position – starting with a little bit here, and adding gradually on the way down to the .802 to .80349 range.

The upside potential for longs on this trade is for EURGBP to trade all the way up to .83373 – which is the 100% Fibonacci price projection line for wave C. That's still around 3,000 pips of upside – which in currency trading is the type of move worth pursuing. Remember to honor thy stops (on a close below the broken downtrend line), though!


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The franc / krona tell is signaling "caution" for now – a surprise given what we've seen recently.

My "proprietary" indicator for the future of risk assets based on the relative strength of the Swiss franc versus the Swedish krona is surprisingly not confirming the recent bullish action in risk assets. As you can see on the top line graph in the chart below, it has been flirting with the downtrend line recently, but has failed to convincingly break out above that line. I've been waiting for such a break to occur as confirmation of what we've been seeing. The failure to do so by this indicator keeps me just a little on edge about being overly bullish of the risk trade here.

Then, to add to the concern being presented by the lack of a breakout, I see that the horizontal support line at 0.13901 is being violated on the downside (meaning Swiss franc strength – the ultimate safety trade). If that situation persists into the close, it would obviously confirm that something stinks somewhere in risk land.


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BONDS

I've already gone a little long with today's article, so I'll keep my comments on bonds brief.
  • Treasury yields are still on the rise (good for risk bulls), but are off of the session highs today. There's nothing alarming here, yet, though.
  • Action in emerging markets and high yield debt is still positive overall – although iShares JPMorgan USD Emerging Market Bond Fund ETF (NYSEARCA:EMB) (my gauge for emerging markets debt) is wavering just a bit.
  • I will note that SPDR Barclays Capital High Yield Bond ETF (NYSEARCA:JNK) (my main gauge for high yield bonds) has major, multi-year resistance at around 41.31 (only slightly more than 1% of upside to that resistance). That level also corresponds with the 100% Fibonacci price projection line for what may be a long-term ABC correction to the upside (see the chart below). I've heard many an esteemed colleague voicing their concerns about the strong (and long-in-the-tooth) rally in high yield debt. Well, this level of resistance may be the one that stops JNK in its tracks. One caveat there, though – compared to where JNK was trading prior to the '08 – '09 crisis, there is still plenty of room for JNK to move higher before reaching historic highs.

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OVERALL

The currency markets will have to come through with a little more upside on several of these charts in order to open up much more upside potential in the near future. The possibility of them failing to do so – along with EMB wavering and JNK nearing long-term critical resistance – has me a little skittish on the risk rally right now. Breakouts will change that skittishness to bullishness, though!

Twitter: @tttechnalytics

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