Sharp Moves in Currencies Could Be Followed by More Sharp Moves -- In the Opposite Direction
The fixed income and currency markets suggest we may see a bit more upside in risk assets in the short-term, but that a reversal lower in risk assets / higher in safety will soon begin.
The Fed pushed their buttons and pulled their strings – at least in terms of the power of their spoken word – last week. The reaction: Stocks and commodities rallied as portfolio managers and traders threw their hands up with disgust and jumped in begrudgingly on the long side. What about bonds? Treasury yields actually rose in the face of the Fed's announcement – likely due to the specifics of the announcement. And currencies? The US dollar continued its recent tank job while the euro continued to crush the bears in a massive short-squeeze. Where do we go from here? Read on for the message of the markets.
The long-term picture of the 10-year US Treasury Note yield shows more downside.
The yield on the 10-year Treasury Note ($TNX.X) is shown on a monthly chart below. The chart shows that the TNX is in the midst of a fourth wave correction after setting a wave iii low over the last couple of months. How high can this correction take the TNX?
The Fibonacci retracement lines (using closing levels – not intra-month extremes) give us three potential resistance levels at which the TNX may stop – 1.955%, 2.241% and / or 2.473%. That last number would also correspond with the closing low of wave i – which is the very highest that TNX could move without violating the wave count put forth on the chart (bright red horizontal line).
Click to enlarge
The more likely upside target – in my honest opinion – will be the 1.955% level. Let's take a look at the daily chart to see why.
The daily chart of the TNX says "up, then down."
The daily chart below shows that TNX already closed above the wave a peak. This indicates to me that the current move up in rates is either a wave c or a more powerful third wave higher. Right now, I'm operating under the assumption that it is a wave c move. If that's the case, then the projected upside target is 1.978% -- which roughly corresponds with the 23.6% Fibonacci retracement level of 1.955% from the monthly chart. Any close above 1.978% will mean it is a third wave move higher and that the upside target for wave iv will be up at 2.241% instead.
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