As I pointed out in my article
Fed in a Box -- Right Along With Its Global
Central Banker Cousins
late Friday, we've seen interest rates and the DXY diverge recently
- forcing us all to wonder whether the truth about the economy
rests with currencies or bond yields. Based on the recent flow of
economic data, it appears that so far there is a more accurate
reflection of reality in the stubbornly low DXY rather than the
As a result of the strange combination of buoyant yields and
sub-par economic data recently here in the US, equities have been
trading indecisively, but slightly lower. Meanwhile, commodities,
and specifically the precious metals have been keying off of the
movements of the dollar rather than rates. So, what does the future
hold for rates and currencies, and how might global equities and
the metals react? Let's go to the charts.
10-year yields stubbornly high - reflecting economic
realities or a trading phenomenon?
The yield on the 10-year Treasury Note is pulling back off last
Thursday's high of 2.92%, but nothing has happened technically to
disturb the overall upward bias in rates. As long as 2.723% holds
as support, this will remain the case in the short-term. My call is
for a wave "iii" move up to 3.019% - 3.021% to occur before pulling
back once again for wave "iv" of this five wave sequence. I'll deal
with projecting the magnitude of this pullback if and when the
upside yield target is met.
High Yield Bonds
The chart below of the
SPDR Barclays High Yield ETF
(NYSEARCA:JNK) is not the type of picture we should be seeing if
the higher Treasury rates were accurately reflecting a growing /
improving economy. This chart is neutral at best / bearish at
worst. Based on JNK being in what appears to be a macro "abc"
correction lower, the downside for JNK should continue for another
5%-6% lower - which translated means short-term bearish and
intermediate-term neutral at best.
Emerging markets bonds just as bad as the JNK chart
iShares JPM US Dollar Emerging Markets Bond ETF
(NYSEARCA:EMB) is shown below going back to the late 2011 sell-off.
Like JNK, this bearish picture is not what the bulls want to see
right now. It looks to this technician like a test of the June lows
is coming - which is only a couple of percent lower than current
levels. Unfortunately for the macro bulls, any rally that should
follow the test of the lows will likely be corrective in nature.
That is not to say EMB won't rally significantly off the coming
test of the lows - it's just that the rally will be some kind of
correction of the 2013 decline.
US dollar futures (@DX) near support but not taking off
despite higher Treasury yields.
As you'll notice below, the current projection is for wave "c" of
the "abc" downside correction to take the DXY down to around 80.51.
Maybe the currency players have been more accurate in their
economic forecasting than the bond markets - as would seem to be
the case based on recent DX trading action and the recent flow of
Once the projected support level is tested, I am currently calling
for a healthy rally in the DX futures to occur which should take
prices up to the 85-88 area. Any break / close below 80.50, though,
and my bullish call will need to be re-evaluated.
Euro futures still stuck in a bearish setup.
The euro futures (@EC) still are threatening to follow through on a
"head and shoulders" topping formation. I've been pointing this
pattern out to everyone since March, but as long as the shoulder
line shown on the chart is not violated (at around 1.3418), this
bearish pattern could easily still play out all the way down to
Yen futures painting a different picture than the
While the euro sets up weak currently, the Japanese yen futures
(@JY) are doing the opposite - at least for the short-term. My read
on JY is that it is in the early stages of wave "v" higher with an
ultimate upside target of 1.0762 at best and 1.04 at worst (from
Will a higher yen and higher dollar mean the safety trade is going
to be back "on" or will the higher yen and lower euro cancel each
other out in terms of their effects on the DXY? Only time will
Aussie dollar futures are reflective of a nasty situation
in Australia - and China.
The Australian dollar futures (@AD) appear to be in the early
stages of wave "iii of C" lower with lots of room to fall before
this macro move is over. The recent jump in the Aussie Dollar -
as mentioned in my article here on Friday
- may have been a case of misplaced hope at best and outright
deception by the Chinese government at worst.
The Australian economy, according to Aussie political and economic
leadership, has to re-invent itself so that it is not so reliant on
natural resource exports to China for its growth and prosperity.
That type of secular shift does not occur overnight and may
actually require the Reserve Bank of Australia to keep the ailing
patient alive while this necessary reconstruction goes on.
The chart of the Aussie dollar futures is reflective of the current
and developing situation in that country. The short-term targets
for the AD are down at the 85-86 range from just above 0.9030
currently. However, if the wave count on the chart is accurate -
and there is no guarantee it is - the long-term target for AD is
all the way down in the 70s.
SUMMING IT ALL UP
- A little higher Treasury yields are possible and then a
modest correction should occur.
- Meanwhile the US dollar should find a floor at right around
80.51. However, the question is how much of a rally will occur -
especially given the mixed messages / setups in the euro (bearish
setup) and the Yen (bullish short-term setup).
What to do here?
- Meanwhile, based on the charts of EMB and the Aussie dollar,
the hope that emerging markets - especially China - will be
rebounding in a big way may be misplaced.
- Perhaps look to accumulate small to mid-cap US stocks based
on the prospects of a rising dollar and persistently high
interest rates. Save cash to buy
iShares Russell 2000 Index ETF
iShares Russell Midcap Index Fund ETF
iShares Russell Microcap Index ETF
(NYSEARCA:IWC) (and the like) on September / October
- I'd be avoiding international equities for now based on that
same thesis. Consider selling or hedging
iShares MSCI EAFE Index Fund ETF
iShares MSCI Emerging Markets Indx ETF
(NYSEARCA:EEM) and the like.
- The only two international
I would be long are the greenback (intermediate to long-term) and
the yen (for the short-term). Consider buying
ProShares UltraShort Euro ETF
PowerShares DB US Dollar Index Bullish
CurrencyShares Japanese Yen Trust
- I would be looking to lighten up on the precious metals as
the DX futures approach their downside target - if not right now.
If and when the DXY rips higher, it can't be good for the
Watch your exposure to levered risk right now
and just be looking to be opportunistic with adding equity
exposure in September and October.