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There were some interesting developments this past week in the FX markets and I wanted to share with you my thoughts and observations heading into next week.
Assuming the scenario outlined in the chart below plays out, EUR/USD is not out of the woods yet. From an Elliott Wave perspective the bear case is well known, the spread widening between German and Greek bonds would merely be another catalyst to keep downside pressure on EUR/USD and the EUR crosses.
German/Greek Spreads
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Based on the monthly chart (see below), a sustained rally may well be getting underway in USD/JPY. Stay tuned for potential NEW TRADE ALERTS
USD/JPY Monthly Chart
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Regarding the chart above of USD/JPY. A big factor going forward will be 2-year Treasury yields. The correlation between 2, 5 and 10-year yields to USD/JPY is quite high - see below, with the 2-year being the most sensitive (not shown in chart). Assuming we get a corresponding break higher in 2-year yields (+1.10%) this should further support USD/JPY
USD/JPY and Interest Rates
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10-year rates broke higher last week above 3.92% but have not continued the thrust. Meanwhile, 5-year rates are set to pop higher too.
5-year rates looking to push higher
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We added a few positions this week and as you will see from the listing below, we are not playing with dollar based pairs. I posted some commentary at the bottom of the page here that was sent to clients on Thursday. It pretty well encapsulates my thoughts on DXC and trading dollar based pairs in the near-term.
Current Positions:*
Short USD/SGD
Long CAD/JPY
Short AUD/CAD (Weekly Service)
Long NOK/JPY (Weekly Service)
* details of trades, i.e. entries, stops etc are available only to clients
From 4/1/2010:
"Earlier I had highlighted the charts of EUR/USD and DXC in the 04/01/10 16:43 GMT posting. Technically, they are pretty clear. However, charts only tell part of the story, inter-market analysis fills in the gaps, which at times, are critical. This is one of those times.
The Dollar Index (DXC) is clearly in an uptrend since the December 2009 lows and as of today, you can either say that the 5-waves higher is now complete or still unfolding. I can see both arguments. Either way, we are likely nearing or at an end to the recent dollar strength. This does not mean long trades in the dollar d0 not have further to run, but the 'easy' money has been made.
Furthermore, if you look at some of the other major pairs as well as the relationship of DXC to the S&P 500, you quickly get a sense that their are some divergences and some indecision going on out there.
Let's take USD/CHF. Up until today I was still counting the move higher off the November lows as the beginning of a 5-wave sequence higher. Not after today.
USD/CHF Daily Chart
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Remember, Wave 4 cannot trade into the area of Wave 1 - thus today's relabeling.
Commodity prices are rallying - note the moves today in copper, oil and to a lesser extent gold. Risk is on.
Chinese (Honk Kong) shares broke higher overnight as well further confirming 'risk on'.
USD/CAD is re-approaching parity at the 1.0000 level - contrary to what DXC has been doing.
So, the bottom line is that there are many mixed signals for DXC and when we have mixed signals the confidence we have in forecasting drops a good deal. What is a bit clearer is that the potential appreciation in the Chinese currency (CNY) will life other Asian currencies, hence we are short USD/SGD and with commodity prices rising again CAD is sure to benefit, especially against a weak currency like JPY - hence our long CAD/JPY position.
It is so critical to examine the markets on many levels - remember, charts are important, but they are not the only thing to consider. Rigorous inter-market analysis is required in order to seek out the higher probability trades."
A couple of other data points to consider as well. The latest AMG report shows continued outflows from money market funds (MMF) and inflows to equities. MMF posted their 12th consecutive week of outflows. As a result, money market assets are now down to $2.697 trillion, their lowest since October 2007. On the flip side, equity funds inflows seeing their 6th consecutive week of inflows, pushing equity fund assets to a new high of $1.728 trillion, the highest level since Oct 2008. The chart below puts this in perspective.
S&P 500 Weekly Chart - danger ahead?
 Click on image to enlarge!
For more from Dave, visit Aspen Trading for more updates. |
