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Evaluating True Upside With Currency Markets Bullish and Bonds Bearish


Currency markets are saying, "I think I can" while the bond markets are casting some reasonable doubts as to the staying power of this rally in the short-term. Here's how to measure potential.

MINYANVILLE ORIGINAL Several weeks ago, I indicated that there should be a rally in the euro, a sell-off in the US Dollar Index, and an accompanying rally in risk assets. I actually gave projected targets for the various moves. So far, only the DXY and stocks are successfully approaching their targets.

The euro / US dollar is having a hard time progressing through initial resistance and there are some minor warning signs coming from the bond markets. Just as I noted last week, the crosswinds being observed in the various asset classes are making it tough to take a high conviction stance towards anything.


We continue to play the waiting game with the EURUSD.

I noted in the opening headlines that the currency markets are saying, "I think I can." Evidence of that can be seen in the euro / US Dollar currency cross (EURUSD) where there certainly seems to be room for the cross to move higher – even as this is a correction scenario. However, so far the 23.6% retracement level has continued to act as stubborn resistance for the cross. Interestingly, stocks and certain commodities have continued to progress higher despite the fact that the EURUSD has churned below resistance. Is the action in the DXY mirroring what we're seeing in the EURUSD?

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The US Dollar Index is shown below. Clearly, the DXY has made it past the 23.6% retracement level and has as its next support the 38.2% level at around 81.81 (from Friday's close at 82.51). That level also corresponds nicely with the 100% Fibonacci projection line for what appears to be an "abc" correction (that level actually comes in at 81.78). So there certainly appears to be room for the dollar to move a bit lower just as there appears to be room for the euro to move higher. Both of those would tend to point to higher risk asset prices.

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The Aussie dollar / Japanese yen cross is telling a similar story to the EURUSD and the DXY.

Moving away from the euro and the US dollar for a moment, let's take a quick look at one of the other key gauges of global risk appetite: The Australian dollar / Japanese yen currency cross (AUDJPY). The daily chart of AUDJPY is shown below going back to Q4 of last year. In the bigger picture, I still believe the AUDJPY should work lower (to below 72). However, in the short-term, the AUDJPY appears to be going through an "abc" correction to the upside with a target for wave "c" of 86.076 (from Sunday night's level of 83.090).

Just as with the scenario of a higher euro / lower DXY, a higher AUDJPY should spell higher prices for risk assets in general and commodities prices in particular.

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Aching to try something new? How about heading south of the border to Mexico?

My former partner at ThirdWave Markets David Weigman has been urging me to take a look at what's going on with the chart of the iShares MSCI Mexico ETF (EWW) for a while now. I did look at it and have been continuing to follow it for months now, waiting for it to break out above some key technical resistance. Today, I decided to take a look at what is going on from the currency perspective and how that may be influencing the equity trade.

The chart below shows the US dollar / Mexican peso currency cross (USDMXN) on a daily basis going back to Q4 2011. At first glance, it is obvious that there is an inverse relationship between the cross and the Mexican equities. When the USDMXN goes down (US dollar weakness), Mexican equities rise. The opposite holds true for when the US dollar strengthens against the peso (USDMXN rises).

Recently, USDMXN has been on a fairly steady decline and has actually breached its long-term uptrend line (going back to 2009). The cross does have some horizontal line support just below current levels, but the first thing I think when I look at the chart is that USDMXN is itching to go lower and the EWW is itching to go higher. The trick is to remain disciplined and wait for the breaks to occur, or you will have a greater chance of top-ticking the EWW trade.

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Here's a monthly look at the EWW. This gives us a better look at the downtrend line resistance the EWW faces.

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No positions in stocks mentioned.

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