Highlights
- Historically Low Bond Yields Point To USD Weakness, YEN Strength
- Actively Targeting USDJPY 80.00
|
 |
| Wednesday, December 17, 2008 - New York Update - 12:55 PM
EST EURUSD is through 1.4200 resistance by quite a healthy
margin on a very convoluted fundamental story. So while EURUSD sorts
itself out, I think it's best to take a step back and focus our
attention elsewhere. The bond market continues its meteoric rise
sending yields to new historic lows in each passing session. And as
US yields are driven lower, we need to continue focusing on the pair
that will give us the most bang for the buck; or in this case bang
for the Yen.
As the bond traders scream from the rooftops that risk aversion
is still king, we need to continue to look lower in the equity
markets. Keep in mind that fixed income markets are a leading
indicator to equity markets. So if US yields and equities are headed
lower, the safe haven currency in Q3 and Q4 '08 has been the dollar
. But recently the talk around the trading desks is that
repatriation and forced liquidations in short dollar positions in
this deleveraging environment is mostly over. So as the demand for
dollar wanes as we slash federal funds to zero, the world is like to
turn back to the traditional safe haven currency - the Yen.
Take a look at the EURJPY cross. You will see that 130.00
resistance is standing guard just above ready to cap any advance.
The similar level in the S&P is 1000. So if equities, bond
yields, the dollar, and EURJPY are all headed either lower or
for further consolidation, the play is not long EURUSD, it's short
USDJPY. Remember to the less the cross be your guide as to which of
the dollar legs to trade. A lower EURJPY in a weakening dollar
environment points you towards short USDJPY, as opposed to being
long EURUSD. A strong EURJPY in a weakening dollar environment
points you towards long EURUSD, and not short USDJPY.
You will notice I am counting USDJPY as an impulsive move lower.
You may also notice that the substructure labels of trend waves 1
and 3 are labeled with letters. Impulses are labeled with numbers,
not letters, right? Well not in the case of an ending diagonal.
Please refer to page 36 in Prechter's Elliott Wave Principle.
Wave C-of-3 looks to be targeting Fib support at 80.80-79.75. I
will be focusing in on USDJPY looking for short opportunities
provided the current market relationships remain somewhat intact.
TG. |
 |
| Tuesday, December 16, 2008 - New York Closing Update - 4:56
PM EST The FOMC cut the overnight funds rate to a target zone of
0.00-0.25%, which equates to a full 75 bps cut as I called for on
BNN on this afternoon, and even venturing into the territory of a
100 bps cut. We seem to be returning to the traditional currency
market driver of trading based on interest rate differentials, as
opposed to trading growth differentials, which has been our
overriding theme in recent months. EURUSD exploded through any and
all resistance levels in this highly illiquid, highly
under-participated move supporting this theory. The explosive upside
action in the 30 year bond following the Fed also supports this
theory. If investors are truly worried about the fed reflating the
economy at the expense of the US dollar, then investors would not be
moving so rapidly into the long dated maturities - especially at a
yield of 2.874%. On a side note, I do not believe we have seen the
bottom in the stock market as fixed income traders are clearly
signaling risk aversion. But the relationship in the dollar to
higher equities and higher fixed income seems to in place after
today's price action. But what I am curious to see going forward is
if EURUSD is moving higher with equities, or if EURUSD is moving
higher purely as a function of interest rate differentials?
In the past three weeks we have seen a breakdown of the
relationship of a higher EURUSD equating to a higher stock market.
We know the EURUSD trend is recent weeks has been straight up while
the S&P 500 chopped around in a 800-900 range. So what I am
curious to see is will the flipside of the relationship holds should
equities turn lower? Will risk aversion drive dollar buying (EURUSD
selling) continue if equities turn lower? If it does, then we know
that markets are not trading purely on interest rate differentials,
but are still trading on growth. Should equities turn lower and
EURUSD goes nowhere, then we know they are.
So, after counting this entire 1.6040-1.2325 move as impulsive
for many months, we now have to entertain the idea that this was all
just a big 3-wave correction to be labeled as A-B-C. I am watching
the backside of channel support-turned-resistance at 1.4200 to take
my cues going forward.
Stopped out of both EURUSD and USDJPY from this morning's report.
So far, this has been my toughest trading month of the year. Back
tomorrow. TG. |
 | | |
