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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 EURUSD has yet to send me any bullish messages.

The euro / US dollar currency cross (EURUSD) has tumbled over the last week as I expected and appears to have some more room on the downside both in the short-term as well as the intermediate to long-term (assuming the wave count I have put forth recently – and which is shown on the chart below – is correct).

The EURUSD appears to be in a wave (((iii))) lower with a minimum downside target of 1.26289, which is not very far away now. Either at that level (which represents the 138.2% Fibonacci price extension line for this wave) or perhaps at 1.25419 (the 161.8% Fibonacci extension line), we should see a modest upside correction / consolidation. The reason for the expectation of a "modest" consolidation / correction is that wave (((ii))) was a relatively deep retracement of wave (((i))) – and the rule of alternation in Elliott Wave Theory would have wave (((iv))) be a "flat" correction with not much upside.

This expected action in the EURUSD should mean similar type of less-than-bullish action in the other risk assets like stocks, crude oil, and gold.

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The AUDUSD is echoing the bearishness of the EURUSD chart.

The Aussie dollar / US dollar cross (AUDUSD) almost had a bullish development in the last few sessions when it came close to breaking above the 1.04108 level (which would have invalidated my rather bearish wave count). Since it didn't, however, I have to assume that this count is correct and that the AUDUSD is in the early stages of wave (((iii))) lower with a minimum downside target of 0.99612. There may be undulations along the way, but the trend in the short-term should certainly be lower for the AUDUSD.

This action pretty much echoes – or at least confirms – the bearish implications of the EURUSD chart. This chart seems to have more downside potential in the short-term than does that of the EURUSD, however.

I was going to show the Aussie dollar / Japanese yen chart, but the message there isn't quite as clear on the bearish side. Actually, the fact that there's a divergence there tells me the Japanese may be attempting to intervene in their currency to keep it depressed against its key trading partners to boost their economy. This wouldn't be the first time for that.

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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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Treasury yields remain depressed as the "risk off" trade remains en vogue.

Since our last check-in on Treasury yields, there has literally been not change technically to the chart of the yield of the 10-year US Treasury note. We've seen a drift lower in yields over the last couple of weeks, but the short-term uptrend (which could also be looked at as the lower edge of a pennant formation) is still intact. Additionally, from a wave count perspective, only a break of 1.599% on the downside would cause me to have to re-jigger the wave counts shown on the chart. For now, my call for an eventual move up to over 2% remains in place.

The implications for risk assets of all of that are that Treasury yields seem to be reflecting the action in the equity / risk markets rather than leading them (for now). So, I'm not seeing anything here that would give the edge to either the risk bulls or bears just yet. All that would change if I saw a breakdown below support levels for the TNX, however.

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Emerging markets bonds have broken support – score one for the bears.

The iShares Morgan Stanley Emerging Markets Bond ETF (NYSEARCA:EMB) finally convincingly broke below its 14-day moving average line a few days ago. That line has been a good gauge for the short-term bullishness or bearishness of the EMB, which in turn is a favorite of mine for taking the temperature of the global risk markets. A breakdown here certainly doesn't help the risk bulls' case although I would never trade on this indicator alone. However, when paired with the bearish messages coming from the EURUSD and the AUDUSD, we have to take the breakdown more seriously.

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Junk bonds are still holding their own. Hey! Score one for the bulls!

The SPDR Lehman High Yield Bond ETF (NYSEARCA:JNK) has managed to hold up above its key 60-day moving average line thus far. This is a small piece of bullish evidence on which those who are long of risk assets can hang their hopes (along with the fact that multiple equity indices remain slightly above key long-term moving averages). I would certainly not be strutting around without a care in the world if I were a risk bull, however. The JNK can break down below support very easily in the short-term as can the equity indices I just mentioned.

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When you put all the evidence together in a pot and mix it up, you still get a result that merits caution on the risk markets (with the exception of the long-term bullish outlook on the Mexican equity markets as I noted earlier). As a technical analyst, I will need to see substantial improvement in the overall technical condition of the euro and the Aussie dollar for me to change my longer-term opinion on the markets. Short-term rallies can and will occur, however, and I will make every effort to call out one ahead of time if I get some signs that one is coming (a tradable rally is more than just a one-day head fake in my world). Right now, no such evidence is jumping out at me.

Twitter: @tttechnalytics

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