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Currencies Raise a Red Flag; Is It Time for a Pause in the Stock Rally?

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Although currency charts are the number-one concern right now, even bonds may be foretelling a pause in the rally in risk assets.

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CURRENCIES

US dollar is in no-man's-land in terms of new entries.



Prognosticating on the short-term movements of the US dollar has been a tough task recently as there have been major cross-currents emanating from the actions of the global central bankers. Both the yen and the euro are major influences on the greenback. The yen is in a historic slide versus almost every currency out there and the euro is oscillating between hopeful strength and more realistic weakness. That has the US Dollar Index (shown above on a monthly chart) stuck in the middle of no-man's-land on a long-term basis. Risk bears out there need to see the DXY take out the long-term downtrend line at about 87 for their macro theses to come to fruition. The risk bulls, on the other hand, need to see the long-term uptrend line broken on a monthly closing basis to be able to claim victory. That level would come in at around 75. So, there's plenty of room in either direction before we would even know who won and who lost this battle. Let's look to some of the other currencies for better clues.

Japanese yen has further to go on the downside before a serious bounce could occur.



The Japanese yen's trip down the ski slope (see the chart above) has been one of the big catalysts for the bullish tone of the equity markets recently. How long will it continue to fall? Well, based on the idea that wave "v" should roughly match wave "i" in magnitude, there still is a little room left for the yen to fall. At this point, I'm calling for a pretty substantial bounce in the yen to begin at or around 0.9618 (the yen closed Monday at 0.9824). There's plenty of downside momentum in the yen right now, though – so be careful about positions size with any bullish yen bets you'd make near 0.9618.

Krona vs. franc indicator breaking the downtrend line – not a deal-breaker for the bears, though.



My firm's proprietary krona / franc indicator is showing potential signs of life (for the bulls). The problem is that we've seen false bullish signals from this indicator before. Notice in the middle of the chart above the downtrend line and arrows which highlight a couple of times when there were false positives from this indicator. Only when a strong re-test of the broken downtrend line occurred was it safe to call it a victory for the bulls. So, as we look to the right side of the chart, we will want to see a successful re-test of the broken downtrend line before I can call it a victory for the bulls. Until then, I'm still inclined to view this indicator as neutral / bearish.
No positions in stocks mentioned.

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