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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.

MINYANVILLE ORIGINAL Is this it? Is this the time where the Fed "splashes the pot" like Teddy KGB in Rounders? Maybe. Let's hope the Fed has better results than Teddy in that last hand…

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.

I've shared with clients recently that my upside target for the S&P 500 (^GSPC) is around 1,485 or so. A move to that level in stocks would fit well with the scenario where TNX moves up to 1.955% - 1.978%. Once we hit the resistance – the level at which a turnaround begins – I'm expecting a correction lower in rates. That move lower (wave v on the monthly chart) should take TNX down to at least a test of the recent low yields and perhaps even lower (it really depends on where wave v commences).

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The euro / US dollar currency cross (EURUSD) has pulled off nearly a vertical rally over the last few weeks, causing a lot of pain for the euro bears out there. I do think it has higher to go still, but a corrective move lower should occur prior to further upside taking place. One possible pullback scenario is shown below:

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US Dollar Index reflects the recent action in the euro.

It's the same story in reverse for the US Dollar Index (see below). The DXY has been falling off a cliff recently – clearly spurring the rally in risk assets on to new heights. It should move lower, but is clearly oversold and should see a corrective bounce soon. One bounce scenario is shown on the chart.

Again, a bounce in the DXY / fall in the EURUSD might correspond nicely with a correction in risk assets (perhaps after just a bit more upside in risk assets in general / stocks in particular).

Click to enlarge

Following Up on Mexico

A few weeks back, I wrote that both the Mexican stock market and the Mexican currency were on the verge of significant technical breaks (to the upside in stocks and in terms of the strength of the peso). This was a unique case where currency strength was not to be looked at as a negative for the domestic equity market (EWW), but rather as a sign that their economy was strong / strengthening and global confidence was growing in terms of Mexico being a place to invest resources.

Here's an updated look at the USDMXN chart:

Click to enlarge

Note that the recent lows just above the 13 level were taken out – which opened up a date with the March 2012 lows at 12.5523. Based on the wave count shown on the chart, I actually think that USDMXN is headed much lower than that – eventually. However, the move lower won't be straight down. I would anticipate some sort of bounce in the cross at around the 12.5523 level. We'll see what happens from there in terms of how high the bounce may go.

How about Mexican stocks? The monthly chart below shows the iShares Mexico ETF (EWW) trading above both the downtrend line (red) and the previous highs (yellow boxes). As noted with the S&P, we may be nearing a short-term peak, but if EWW can hold the breakout (above both the trend line and the previous highs) into month's end it would move into the "buy the dips" camp very quickly.

The next upside target for EWW assuming the breakout holds will be $73.25 – from its current level in the mid-$60s. As mentioned in previous reports, the driver here seems to be the weakness in the US dollar versus the Mexican peso (USDMXN). As noted above, I'm expecting some sort of countertrend rally to occur once USDMXN nears support. However, despite whatever bounce we may see in that currency cross, I do see more weakness there in the intermediate to long-term – so the wind should be in the sails of EWW.

Click to enlarge


What I'm seeing in the fixed income and currency markets tells me that we may see a bit more upside in risk assets in the short-term (perhaps into quarter's end), but that a reversal lower in risk assets / higher in safety will soon begin. Look for signs of a reversal at this point – don't fall asleep while your opponent is going "check, check, check all night" as Mike did to Teddy in Rounders.

Twitter: @tttechnalytics

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