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It's Risk On in Bond Land, but Currencies Are Sending Caution Signals

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For months now, the global bond and currency markets have been very much in unison in singing a bullish tune for risk assets -- but not as much right now.

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High-yield bond have broken above multi-year resistance on a weekly basis. Will that hold into month's end?


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The SPDR Barclays High Yield Bond ETF (NYSEARCA:JNK) has finally taken out the long-term horizontal line resistance from 2010's peak, lending more credibility to the recent bullish action in stocks. The breakout has occurred on a daily and weekly basis. Now, we would just love to see the JNK hold above $41.32 into the end of the month for the breakout to have added credibility.

Overall for Bonds

The only bearish evidence I can find in bond land is from EMB – and that may just be a function of managers taking profits there and shifting them elsewhere. It does not necessarily mean a massive move out of risk assets in general. The action in Treasuries is fine and the action in high-yield debt is encouraging thus far. The only bond chart I did not feature this week was the German Bund. The only thing to note there is that all appears to be fine over in Europe for now. Bund yields are on the rise right along with the euro currency (more on that below). So, overall, the message from bond land is "risk on."

CURRENCIES

The Canadian dollar was the first to send up a warning flare.


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Over the last few weeks as the euro has ripped higher and the Aussie dollar seemed to have been gaining some traction, the once "risk" currency that seemed a bit out of sorts was the Canadian dollar (@CD). Well, this week, CD has broken below short-term support and clearly (by the looks of the chart above) seems destined for further downside – at least to the dual support of the 100% Fibonacci price projection line (aka "correction support) and the lower edge of a long-term pennant formation. I'm not sure if the Canadian government is pushing this lower or if it's a matter of natural trading forces doing so. Whatever the cause, CD bulls had better hope that the dual support holds up! In terms of the macro message CD may be sending us, let's call it "risk off" in the short-term.

The Aussie dollar has jumped back into the bears' camp by failing to hold its breakout again.


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The Aussie dollar was holding up pretty well – better than the Canadian dollar but worse than the euro – over the last few weeks. However, the Aussie buck has failed once again to hold its attempt at a breakout above its long-term "correction resistance" at 1.0549. This is now the third time on the monthly chart that this breakout has been attempted. The battle is not over yet, but unless the bulls get it together by the end of the month, this will be another little piece of evidence for "the tide is turning" argument. If, on the other hand, we see a bullish breakout into month's end, there appears to be much more upside ahead for the Aussie dollar. Needless to say, this bears watching.

The euro stands alone in terms of a risk currency showing good short-term technical action.


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The leader on the risk currency side has been the euro. It is amazing that this dog has morphed – at least temporarily – into a bullish leader. Let me be clear: I am not sounding a bullish long-term signal for the euro. This upside, as can be seen on the chart, may very well be just an upside "abc" correction in a macro bear market. In fact, when the euro gets up to 1.3743, I will be putting my money where my mouth is on that one. I would not want to be short of the euro futures or any of the major euro crosses until that point, however.

Overall

So, as noted at the opening, bonds are still relatively bullish while parts of the currency markets are telling us a more "neutral" story. Nothing is overly bearish in currency land yet, though – not even the Canadian dollar. So, do not take the fact that I am bringing this info up as me turning bearish on the risk trade. It is all just important info worth monitoring.

Twitter: @seachangereport

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