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Currencies and Bonds Are Now in Unison: 'Risk Off' for the Short-Term


There was some smoke the last time I shared my thoughts on the interest rate and fixed income markets several weeks ago. Now, there's actually some fire!

There were some warning signs coming from the bond markets (from EMB and JNK in particular) and certain parts of the currency markets (specifically from the Aussie and Canadian dollars) the last time I checked in. However, the euro was holding up well and the US Treasury markets simply weren't sending any bearish "risk off" signals at that point.

Now, as I will show below, we're getting bearish (for risk assets) messages from just about all of the currency risk gauges (the obvious exception being the yen) to go along with the bearish charts for EMB and JNK. We are still seeing a good set-up in Treasuries (for the risk bulls). So, if we were using a balance beam scale (like the "Scale of Justice"), it would definitely be tilted more in favor of the "risk bears" at this particular point in time. Let's go to the charts to see the evidence.


The euro futures are breaking short-term support – but all is not lost for the intermediate to longer-term yet.

Euro futures (@EC) have broken and closed below their "correction suppport" at 1.3385. That doesn't necessarily mean a new bear market has begun for risk assets, but it does indicate that there's more downside ahead for the euro in the near future. The bulls would love to see the dual support (at the intermediate-term uptrend line and the horizontal line at 1.3259) hold strong. If that happens, there is still a very good chance of the euro turning back up and rallying once again. If not, even more downside potential will be opened up for the euro in the short-term.

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The Aussie dollar remains below key resistance on the monthly chart.

The Aussie dollar futures (@AD) tried and tried again to break through the key "correction resistance" level of 1.0549 on the monthly chart over the last three to four months. Each time they tried, however, they were pushed back down below resistance by month's end. Now, for the first time in a while, we're actually seeing a pick-up in momentum to the downside. The bulls still have some hope as long as AD doesn't break / close below 0.9998. Unfortunately for the risk bulls, the fact that I'm thinking it can go down that far before support is found is a short-term "risk-off" signal.

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The Canadian dollar seems destined for a test of major support just below current levels.

Canadian dollar futures (@CD) have been mired in a long-term pennant formation since July of 2011. The lower edge of that formation comes in at 0.9845 – not that much lower from current levels (CD was at 0.9910 Monday morning). That level not only represents the lower edge of the pennant formation, but also the 100% Fibonacci price projection line or "correction support" for CD. The risk bulls had better hope that CD can manage to hold up above this key support area. Until that level is tested, though, it's a "risk-off" message coming from Canada's currency.

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The US dollar broke above short-term support and seems to have more room to the upside.

The US dollar futures (@DX) managed to break above the 100% Fibonacci price projection line or "correction resistance" on Friday and are confirming that breakout today (so far). All that breakout means is that DX has more room to the upside in the short-term. It does not indicate a new bull market in the greenback (yet). Based on the daily chart of DX below, it appears that the next key resistance area will be at 80.995 (from 80.455 currently). Any break and close above that level will signify to me that the greenback has more work to do on the upside. Whether that would be part of a new macro trend higher is still in doubt, however. For now, the message from the greenback is "risk off."

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The yen remains under pressure from the Bank of Japan, but is very oversold in the short-term.

The Japanese yen futures (@JY) are still mired in their "self-imposed" bear market. However, they did hit one possible third wave (wave iii) target recently and should – under normal circumstances – be poised for at least a wave iv consolidation. Such a consolidation would have a likely upside ceiling of 1.1189 to 1.1533. However, these are not "normal circumstances." Rarely do we get to see a government so obvious in their intent and actively involved in pressing down their own currency – especially after a substantial (at least in the short-term) drop. But the BOJ has made it clear that it wants the yen even lower – low enough to take the Japanese economy back up to "respectable" levels (along with their stock market).

So, it is difficult for me to read the action in the yen as a true "risk off " signal – which is what such yen weakness would normally be telling me. Rather, let's see it for what it is – a short-term tailwind for Japanese equities (especially the ADRs of Japanese companies listed here in the US). Past that, while I acknowledge this as a win for the risk bulls, I am refraining from reading too much into the yen's recent trading activity.

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The Swiss franc is also not as clear in its macro message.

The Swiss franc futures (@SF) appear to have more upside ahead of them (which would be good for the "risk off" crowd). However, in the very short-term, the franc is correcting lower. It should have a floor of about 1.07, though, and still has an intermediate-term upside target of 1.1321. Right now, I'm giving this chart a "neutral" reading on the "risk-on / risk-off" meter.

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Overall, as I noted in today's opening, the scales are tipped slightly in the favor of the "risk-off" crowd for the short-term. Here's a summary:

Twitter: @seachangereport

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