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!
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:
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