What Can Be Made of Conflicting Signals From the Currency and Bond Markets?
Crosswinds in the asset classes are making the intermarket picture a bit harder to read.
Treasury rates are starting to inch higher – despite the jaw-boning from the Fed.
Treasury note yields have continued to grind their way higher – despite the attempts last week by various Fed heads to jawbone rates back down. The yield on the 10-year Treasury Note ($TNX.X) made it to an intraday high of 1.729% (1.688% on a closing basis), which took it to a level beyond the "correction" resistance level of 1.644%. What that means is that if the recent move were just an "abc" or "zig-zag" correction higher, yields should not have eclipsed the 1.644% level. The way I'm viewing things right now, while we could certainly see a day or two of lower rates, the trend higher in rates should continue for awhile longer. My ultimate upside target (for this move) for rates remains up at 1.949%.
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Emerging markets bonds are finally seeing some downside. Is this a leading indicator?
For quite awhile now, I've been pointing out the relationship that exists between the price of the iShares MSCI Emerging Markets Bond ETF (EMB) and its 14-day moving average. The chart below reiterates that strong relationship. Notice how the price has used the 14-day moving average as support consistently since the price bottom in late May / early June (green circles). Notice also how breaks below that average (yellow circles) have been good times to take profits / protect capital in the EMB trade.
Well, this morning's price action is taking EMB back below the moving average support for the first time in several months. Obviously, we will want to see how the day finishes out, but a breakdown below that line will be enough of a bearish signal for me to exit the trade. I also have the old uptrend line – that has been both broken on the downside and then recaptured recently – overlaid on the chart as those lines sometimes have a way of re-establishing their importance. Right now, though, I'm mainly focused on the potential breakdown below the moving average.
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Historically, EMB could have helped out as a leading indicator. For example, in October 2008, it made a major spike low along with the rest of the world. However, in March of 2009, it posted a major higher low as most of the major equity and risk asset indices were making new lows. Then, in 2010 when the S&P was making lower lows (during the "flash crash"), EMB failed to make a new low – which would have ended up being a nice entry point for the bulls.
Recently, the relationship has not been as clear. In fact, in some cases it looks like the S&P may have been leading EMB. For example, at the current juncture, is it the S&P that is forecasting a lower EMB with its failure to make new highs (entirely possible) or is it the EMB's stubbornness in remaining above its late Q1 highs that is forecasting an S&P move to new highs? I'm not 100% sure on this one. The euro (see further down in this article) is acting fairly well and the DXY looks like it can still move down further. When you take those two items along with the prospects of higher Treasury yields and the EMB still hovering above those Q1 highs, you can paint a pretty bullish picture. However, if a breakdown (using closing prices) occurs in the EMB below its key moving average, some creeping doubts enter the picture.
Hey, if this game were easy, everyone would do it, right?
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After backing off of resistance, the euro is showing some renewed signs of life.
I was a little surprised to see the euro / US dollar cross (EURUSD) back off of the 23.6% Fibonacci retracement line resistance level like it did over the last week. However, no technical damage was done and today the EURUSD is once again moving well to the upside. It will have to overtake the 1.23969 level on a closing basis to confirm that still higher prices are ahead. Stay tuned as I fully expect the news flow out of Europe to pick up now that Angela Merkel is back from vacation.
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The US Dollar Index remains the opposite picture of the EURUSD.
After a few sessions back on the upside, the US Dollar Index ($DXY) is trading lower once again. It looks like the 38.2% retracement level of wave (i) at 81.81 is the downside target upon which we should be focused. I'm nearly certain we'll see a test of that level. I'm also thinking that an intraday test of the wave i closing peak at 81.51 may occur. Perhaps it will be both that occur on the same day.
In any case, I'm looking for a little more upside in risk assets as the EURUSD and DXY make these moves. It's what may happen afterward that may give the bulls indigestion. So, enjoy the party while it lasts.
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I'm still of the opinion that we will see some more upside in risk assets before this rally is really over. We'll see if that comes to fruition.
Before I wrap up, here's a check up on the key European sovereign debt yields:
No major moves this past week in the yields of the key European sovereign debt yields. Perhaps that's because Merkel was on vacation. Well, now she's back to work, so look for some movement in the coming days.
That's it for now! Have a great week!
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