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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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