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Currencies Pointing to a Pause in the Equity Rally, but Nothing Serious


A possible rise in the yen in the short term has the bulls keeping the champagne bottles put away for now.

Before I jump into a look at the key gauges of risk in the currency markets, I wanted to take a look at a couple of currencies that will be driven by headlines today.

The pound futures are oversold and at possible support, but appear to have more downside work to do eventually.

We saw British home prices come out better than expected, industrial and manufacturing production and trade balance come out far worse than expected, and are still waiting on a GDP estimate later this morning. The dominant numbers so far appear to have been the weak production and trade balance numbers early this morning as the pound is trading off noticeably this morning.

Given how oversold the pound appears to be on the weekly chart below, I would be looking for a short-term rally to around 1.52 or so before aggressively betting on pound weakness. The eventual target for the pound is all the way down at 1.3805, but possible short-term support comes into play at 1.4775 – just below current levels. If and when that level is taken out on the downside, I will have my confirmation that the pound is headed down to my targets. So, I would remain in "sell the rips mode" for the pound until further notice.

Canadian housing starts data are due out with the Canadian dollar oversold and due for a little bounce. Whatever bounce occurs, though, should lead to more downside.

This morning, Canadian housing starts data will be released. The expectations are for a month-over-month decline – but nothing overly concerning for the bulls on the Canadian economy.

As the release of this data is approaching, the futures for the Canadian dollar (@CD – shown below on a weekly basis) are hitting very oversold levels – meaning a bounce may occur at any point. However, the CD futures still have more work to do on the downside before any major up move may occur.

So, I would be using any bounce up to around 0.9600 to sell or short into and I would be looking to cover those shorts and/or make serious long-side plays at around 0.9325. When it comes time to go long the Canadian dollar, I would be looking to short the USDCAD or go long the CADJPY if I were not playing the futures contracts directly.

Now, onto our regular check-in on the key risk gauges in the currency markets.

The yen is nearing a point where a counter-trend rally may occur.

The Japanese yen futures may have one more bounce for the bears to endure before the macro downtrend resumes. The yen appears to this analyst to be approaching the end of wave "B" of the "ABC" correction that will make up wave 4 on the chart. My projected support for this move lower should come in at 0.9786 for the Japanese yen futures contracts. The proximity to support and the oversold Williams %R reading give me a higher degree of confidence in my short-term bullish opinion. Once that support level is tested, I am anticipating a move up to around 1.0750 for wave "C" of the upside correction. The wave "C" move appears to be very tradable on a reward to risk basis as long as entries are made as close to support as possible (so that a stop-loss is not too painful if it occurs). As mentioned earlier in this article, I would likely favor shorting EURJPY if I were to play the currencies directly instead of via the futures contracts.

A short-term rally in the yen may, if recent relationships hold true, coincide with a short-term correction in risk assets – namely equities.

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No positions in stocks mentioned.

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