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Currency Markets Foretelling Correction With Lagginess


The key risk tells in the currency markets - the Aussie Dollar and euro versus the greenback and Yen - are not uniformly in support of equity markets' bullishness. Will they perk up or will equities come back to earth?

The Yellen/Bernanke headlines last week in theory should have been very bullish for crosses like the AUD/USD and the EUR/USD, while the general "risk-on" attitude globally has been weighing down the Yen quite a bit – and thereby boosting AUD/JPY and EUR/JPY. Has the former supposition been the reality? The answer is yes, but it's not an overwhelming yes. Let's go to the charts to see what's been going on.


S&P 500 e-Mini Futures

The S&P e-Mini Futures contract has been in a beautiful bull market rally for quite a while now, and in the midst of a five-wave sub-rally since late August. More specifically, the "minis" appear to be in wave (v) of (iii) to the upside, with potential upside targets of 1,828 and 1,863 – although I personally think 1,828 will be a short-term ceiling. Once a top is made for wave (iii), I will be anticipating a corrective/consolidative move down to 1745 - 1775 before another up move to 1895 – 1926 should, in theory, unfold.

So, in plain English, there may be less than 2% of upside left in the current wave higher and up to 5% of downside potential for the anticipated correction once a top is made. Shorter-term traders will certainly be taking profits near resistance, but a 5% correction isn't likely to shake folks out of long-term investment positions.

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Where's the Leadership in Equities These Days?

As I took a look at the usual suspects in my regularly scheduled relative-strength analysis, I see a pattern of the S&P (INDEXSP:.INX) outperforming both the Nasdaq (INDEXNASDAQ:.IXIC) and the Russell 2000 Small Cap Index (INDEXRUSSELL:RUT), and a less meaningful result of short-term MSCI Emerging Markets Index (NYSEARCA:EEM) strength from the EFA (NYSEARCA:EFA) vs. EEM comparison. Why is the latter less meaningful? Because of the DXY/EEM ties and the fact that the decline in DXY is at or nearing an end (in my opinion).


Aussie Dollar/Japanese Yen – A Win for the Bulls?

If the AUD/JPY can hold current levels above 94.15 into the close, it will be a nice bullish breakout for the cross specifically as well as for risk bulls in general. If my wave analysis on AUD/JPY is correct, the cross may be in wave "C" of an "ABC" upside correction, with an eventual target of 100.70 from 94.38 currently. Clearly, a break above the recent peak from October at 95.67 will be required for this bullish scenario to come to fruition. Right now, unless a real bearish turnaround occurs, this chart has to be encouraging for the bulls.

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Euro/US Dollar – Not Echoing the AUD/JPY's Bullishness

The EUR/USD bulls have been trying to recapture the broken uptrend line (at approximately 1.3540) for several days now – thus far unsuccessfully. In addition to that line being resistance, notice that the blue Fibonacci retracement lines provide resistance at the 50% line at 1.3547 and that the dark red Fibonacci price extension lines on the right side of the chart give us a resistance of 1.3546. All of this resistance points to the bearish end of the scale in terms of the short-term outlook.

This bearishness in the EUR/USD could be a result of pending European weakness or perhaps a more bullish turn in the greenback's relative strength. I happen to subscribe to the idea that once we are past the upcoming political/budget choppiness in Washington that the FOMC will be more inclined to start tapering. There's no way they – in their minds – can begin tapering right now when the folks in DC have shown such a propensity to screw things up for everyone.

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To me, it looks like we will see a bit more to the risk-asset rally in the near-term followed by a modest correction in risk assets/rally in safety assets only to be followed finally be another nice shot to the upside. To predict how the pieces of the puzzle may fit together to create this macro-forecast seems a fruitless venture given the possible changing dynamics between asset classes (i.e. when good news finally becomes good news, etc. – causing rates and the DXY to rally even as stocks rally). Just know that the Tepper Trade (Fed backstopping everything until the economy and markets eventually take the baton and run on their own) seems to still be in effect for now and for the foreseeable future.

Twitter: @seachangereport

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