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Currencies Signaling 'Risk On', but Regional Weakness in Asia Stands Out

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The real message of today's analysis may be that Asian currencies are displaying weakness while Western currencies are showing strength.

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As we head into 2014, I wanted to take a look at a very high view of some of the go-to currency pairs that big money uses to gauge the global appetite for risk assets. The findings are interesting, to say the least – especially from a money-making perspective, as the trade setups are very attractive.

EUR/USD has a short-term hurdle coming up, but looks bullish overall.

While I never like to jump the gun on a technical breakout or breakdown happening, the weekly chart below of the EUR/USD shows signs of wanting to go significantly higher. My best read on the chart of EUR/USD is that it is in the midst of an up move that will take it at least to 1.44128 (if this is merely an upside correction of the A-B move lower that occurred from 2011-2012) and more likely up to 1.50503 (if this is, as I suspect, part of a larger correction of the late 2009-early 2010 down move). Either way, it looks to me like a breakout above the red downtrend line is set to occur – even if it does so after the troops amass below that trend line resistance for a spell.

The bottom line here is that the euro is currently showing and will likely continue to show good relative strength versus the US dollar for a while (for the next several months at the very least). Let us place this chart into the "risk-on" category for the short to intermediate term.

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EUR/JPY has been more bullish than EUR/USD but may need to correct.

The next chart below shows the euro/Japanese yen currency cross (EUR/JPY) on a weekly basis going all the way back to 2007. This chart is even more bullish in terms of the short- to intermediate-term prospects than that of the EUR/USD. With EUR/JPY currently trading at 145 and change, the very short-term projection for the cross is for it to reach at least 146.591, at which point a consolidation phase is expected. Once that consolidation has run its course, I am expecting another upside run to at least 149.249 to occur. At that point, a more substantial retracement of gains may occur – likely a better opportunity to make serious long-side entries. Why enter then? Because my ultimate projection – even in a macro-bearish case where this is just a massive upside ABC correction – is for EUR/JPY to eventually make it up above 165.

Again, the bottom line here is that the "risk end" of the pair – the euro – is likely to show good relative strength versus the "safety end" of the pair – the yen – for quite a while. There will be corrections lower, of course, but those should (in my opinion) be used as opportunities to buy. Once again, we will place this cross into the "risk-on" category for the intermediate-term.


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AUD/USD also putting out "risk-on" messages for the intermediate-term.

The other currency frequently used as a go-to gauge for the global appetite for risk is the Aussie dollar. Like its Asia-Pacific cousin, the yen, the Aussie is showing very obvious relative weakness versus global currencies right now. The chart below shows the Aussie dollar/US dollar (AUD/USD) on a weekly basis going all the way back to 2004. My best read on this chart is that the AUD/USD is in the midst of a macro down move – wave 5 of III lower to be more precise. The downside target for this wave is at 0.84410 (versus 0.89187 currently), which is plenty of downside potential for the bears to enjoy. However, the cross is oversold currently and may bounce at some point soon. I would be waiting for the cross to make its bounce attempt and look to sell it at or near one of the resistance levels shown with the red lines – 0.9166, 0.94469, or 0.97562.

The bottom line here is that the "risk currency" – the Aussie dollar – is very weak versus the "safe-harbor currency" – the US dollar. So, if we are sticking with this exercise, let's put the AUD/USD into the "risk-off" category.


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AUD/JPY showing "risk-on" tendencies short-term, but longer-term dangers.

The chart below shows the weekly AUD/JPY chart going back to 2007. I call this one a true battle of the last-place teams as both the Aussie and the yen have been dreadful versus most of the other global currencies out there.

The most bearish scenario is where AUD/JPY is in the midst of wave "c of 2" higher with a ceiling of 98.369 (from 93.641 currently). The mid-case scenario is where it's still a wave 2 higher, but with a ceiling closer to the wave "C" peak at 104.523. The most bullish scenario is where the cross is not in a correction higher, but rather a new primary move higher. In that case, the 104.523 level would be sliced through like a hot knife through butter.

So, even in the most bearish scenario, we have nearly 5,000 pips of room to run on the upside. The best part for the bulls here is that they are not faced with ridiculously overbought conditions, so entering the long side does not involve the same amount of trepidation that is likely involved with buying into EUR/USD or EUR/JPY.

Let's label this chart "risk-on" for the time being, as, in my opinion, the "risk currency" (the Aussie) clearly seems to have the edge versus the "safety currency" (the yen).


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Summary

Overall, it appears like the "risk-on" environment we've seen for quite a while now will likely stay in effect on a macro basis, with some short-term corrections surely to occur. In this scenario, it is during those corrections where managers (and you) will want to deploy new capital to the risk assets on their radar screen.

However, one observation I would like to make here is that instead of "risk-on" or "risk-off," the true message of today's charts may be one of regional strength (in the West – Europe and the US) versus regional weakness (in the East – Australia and Japan). By strength or weakness, I am referring, of course, to the countries' currencies and not necessarily the countries themselves. The countries could be fine overall, but may be experiencing less than ideal growth in their economies, and their respective leaderships are simply taking a dovish approach to their currencies in an attempt to rejuvenate their economies. A follow-up question must be posed: Is this weakness somehow tied to underlying weakness in China? The answer to that must be researched further, but my gut is that Chinese issues are at least in part responsible for the relative weakness in the yen and Aussie dollar currencies.

Twitter: @seachangereport

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