Currencies and Bonds Indicate a Bounce May Be Near
While we may still be in a "sell the rips" mode on an intermediate-term basis, the short-term may bring us a tradable rally in risk assets once certain support levels are reached.
Here's a better look at where EURGBP may be headed.
The chart below gives a wider view of the EURGBP set-up. Again, notice that once the support at around 0.79444 is tested, the minimum upside (even if this is merely a larger "ABC" correction and not a new thrust higher) comes in at 0.83218 or so. To me, that's a trade worth taking!
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Was the recent breakout (krona strength) a head fake?
I've been touting the merits of my newly discovered tell in the currency markets – the "franc vs. krona" indicator. Last week, the EURCHF / EURSEK spread ratio crossed above the short-term downtrend line (indicating a possible change in trend from franc strength to krona strength). That change may still be happening, but the ratio has fallen back below that trend line – which is not good, but not a deal breaker in and of itself.
There are still lower highs in place on the ratio (bearish for risk assets) but the ratio has not yet set a new lower low (hopeful for risk assets). If we see 0.13942 on this ratio violated on the downside on a closing basis, a new lower low will have been made and the signal coming from this indicator will remain a bearish one.
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Treasury yields nearing critical support level.
I have put forth for a while now that I'm expecting a decent move higher in interest rates. By decent, I mean that even a corrective move in rates to the upside could take yields up to 2.031%. If the up move were to be something more than a correction, obviously the targets for rates would be much higher (2.21% to 2.321% by my current calculations). Thus far, my call has not come to fruition as the "risk off" trade has been in play for the last several weeks and the Fed is likely leaning all over rates to keep them as low as possible for as long as possible.
As long as the downside support at 1.562% to 1.573% holds up, my call for rates to rise sooner than later may come to fruition. However, a break of 1.573% will be a major shot across the bow and a break of 1.562% will be a deal breaker for this call. Pay close attention to this battle!
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