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Signals From Bonds and Currencies Remain Mixed

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What will that mean for all of the asset classes in the short term? Here, a look at bonds and the dollar as well as the biggest influence on the greenback -- the euro.

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To sum up what I'm about to share – I'm expecting more of the same, short term. What does that mean? I'm expecting a burst higher in rates and the US Dollar Index (DXY) in the very short-term, which should correspond with more equity strength. Once certain target levels are met in yields, the DXY, and stocks, we should see a downside correction in rates, the DXY and, at least if the most recent intermarket relationships hold up, stocks. Let's take a look at the charts to illustrate my views.

BONDS

The short term is pointing to higher yields/lower prices in Treasury land.

Based on the charts below of 10-Year Treasury Futures and the 10-Year Treasury Note Yield (INDEXCBOE:TNX), it appears that rates may work higher in the near-term (sending Treasury Futures lower). These moves should be the fifth wave of a five wave sequence (to the upside in rates and downside in prices). The only way I see the move up in yields / down in prices is if we see corresponding short-term strength in risk assets. Once targets are hit, though, we may finally see the correction in risk assets for which the bears have been calling.

Treasury Futures

The chart of Treasury futures shows a short-term topping in prices right at the max resistance for the recent up move last week at 124'20.5. Any close above that level would throw the current wave count out and force me to re-assess what I'm seeing. For now, though, my call is for bond prices to fall down to the lows set at the beginning of the month.


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Yield on the 10-Year Treasury Note

The chart of T-Note yields below shows the opposite of the chart of the Treasury futures above – as expected. As long as the 2.768% level is not violated on the downside, my call is for yields to move up to the wave "(v) & v" target of 3.078% before a more significant pullback in yields commences.

This outlook for higher yields/lower prices is almost certain to correspond with continued strength in equity prices. I for one will be surprised if it doesn't.


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CURRENCIES

The US Dollar Index has a bit more upside before key resistance is tested.

Unlike the bond charts, the chart below of the US Dollar Index is not as clear in the short-term outlook. The move down in the DXY from the November 2013 peak to the December 2013 lows could either have been wave (ii) or wave "a" – the wave "(ii)" scenario is shown on the chart. In the scenario shown on the chart, the DXY will break through the 81.48 resistance level and proceed on up to around 82 in a wave "(iii)" move. On the other hand, the long-term outlook remains bullish, but a short-term peak may have been made or is ready to be made at the 81.48 resistance level. That peak would be a wave "b" top and would be followed by a test of the November lows near 79.

Given my outlook for the short-term move up in rates / down in bond prices, one would think that the 81.48 resistance level is in trouble, big time. However, we have to remember that with the DXY, it is not only what happens with US rates; it matters tremendously what is happening in other key currency partners like the euro and the yen. So, while rates say the DXY should have more upside, the DXY's chart agrees (in the wave "b" scenario) only modestly – perhaps because of what is going on with the euro and the yen. In the wave "(iii)" scenario on the DXY chart, the magnitude of the move up to 82 level would actually correspond fairly well with the upside expected in rates / downside in prices. In either scenario for the DXY, its direction appears higher in the very short-term. I now want to take a look at the chart of the euro/US dollar cross (EUR/USD) to see if the outlook there matches up with what we've seen in today's charts thus far.


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The EUR/USD cross shows more weakness short term, but should rip higher.

I see two possibilities in terms of wave counts for the EUR/USD. The first, which is shown below, has the EUR/USD in the earlier stages of wave "C of 2" higher with an eventual target of 1.51059. It may have just hit a temporary wall at the long-term downtrend line and is being forced to amass more troops at the gates before storming the castle.


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The second scenario has the EUR/USD merely in a wave "ii" upside correction with a target of 1.44873. In either case, the EUR/USD appears to need to correct lower in the very short term (corresponding well with the call for US rates to have some upside in the short term), and then move significantly higher once this correction lower plays out (corresponding well with the expected weakness in rates and the DXY that should follow).


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Twitter: @seachangereport

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