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Messages From the Currency and Bond Markets Continue to Warrant a More Conservative Stance


There are some minor signs of hope in the resiliency of the high yield bond markets and the potential change (which hasn't happened yet) in the franc / krona indicator.


The trend in the relative strength of the Swiss franc versus the Swedish krona is still intact, but for how long?

I've highlighted here recently that there is a leading relationship between the EURCHF / EURSEK and the global equity markets. When the franc is showing relative strength versus the krona (when the EURCHF/EURSEK spread ratio is trending lower), the global equity markets are generally weak (and the opposite holds when the EURCHF/EURSEK is trending higher). The other helpful aspect of this spread ratio is in the turns. We can use turns in this ratio to approximate the duration of bullish or bearish phases in the risk markets.
Right now, the EURCHF/EURSEK spread ratio is challenging the downtrend line that has been in place since August. If that line is broken, I can extrapolate out roughly two to three weeks from the recent low in the line to estimate when stocks will catch a bid (based on recent relationships holding). That would imply that sometime this week or next we should see the beginnings of a rally phase in equities.

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The long-term trend in the USDMXN has turned lower, which should mean good things for Mexican equities.

Before I leave the currency markets for the day, I wanted to re-visit one of the charts I highlighted here not too long ago: The US dollar / Mexican Peso currency cross (USDMXN). In a previous article, I showed that, contrary to other currency / equity relationships in other parts of the world, the Mexican equity markets seem to do well when their currency is strong against the US dollar.

In many developed countries or regions, a weaker domestic currency typically spurs on more exports and is bullish for that domestic equity market. However, in this case (as I pointed out in the previous article), the Mexican peso's bullishness seems to be a sign of greater economic growth prospects and increased confidence in Mexico as a place in which companies can do business (i.e., more stability and less danger). The side effect of this confidence is obviously bullish action in Mexican equities (represented here by the iShares Mexcio Index ETF (NYSEARCA:EWW)).

The USDMXN cross recently broke below the uptrend line (indicating strength in the Mexican peso) that had been in place since July of 2011. Simultaneously, the EWW broke out above the green downtrend line that was in place during that same time frame. Since these are monthly charts, I place a great deal of importance on such breaks. Actually, the chart of the EWW looks a bit like a very long-term cup and handle technical formation – with the recent breakout above the downtrend line being the expected bullish break out of that formation as well. However I look at it, it makes me want to buy the dips in Mexican equities – no pun intended.

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No positions in stocks mentioned.

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