We’ve long been looking for some type of bad news out of Europe that would allow for the euro to trade lower versus the dollar, rather than good news out of the US that would push the dollar higher. We may get that today. The Italian referendum today could be the nail in the coffin for the euro. The Brexit and Trump votes were anti-establishment, and likely have emboldened “no” voters. But, Italy isn’t the UK, not the US. Structurally, it’s been in decline since 2000, and its banking system and outstanding debt won’t be contained on an exit of the EU. In other words, Italians may be thinking that a Brexit type outcome (lower currency, higher stocks) will be the result of “no,” but I think that’s highly unlikely. Instead, it may get a big sell-off in sovereign debt, undermining the banks – a bad move higher in yields which will compress asset values there.
Wave (2) didn’t quite retrace 23.6% of wave (1), but we think it may be complete. RSI is out of Sustainable Bear territory, so the market is set up for a reversal. Don’t fight lower prices if we get them, and a further push higher will only be temporary if it happens. We’re bearish, and the .382 Fibo of wave (1) is near 1.0800, which we see as the most euro bulls could hope for.
The pound reversed higher which negated our idea that wave ((4)) had topped. But, there’s still substantial overhead resistance, and we’ve likely seen the bulk of the gains already. We’re awaiting a top and reversal pattern lower.
We think wave (ii) has topped, and another i, ii has unfolded. That would mean substantial, immediate downside versus .7498. A push above there means wave (ii) is turning more complex.
Aussie may follow this path too, or at least, NZD’s action may subdue any “substantial” downside until its upside correction is complete.
I’m having a hard time figuring out a reason for the CAD to rally, but that’s what the chart suggests. We can be bearish USD versus CAD against 1.3400, for at least a retest of support. What we may get is a ending diagonal for wave (C), which won’t exceed the wave (A) low. So, perhaps a choppy decline into the 1.2700 area is what will unfold. The main reason we don’t love CAD is the impending disaster in its real estate markets in Alberta and elsewhere. The same is happening in Australia, and maybe globally again. Regardless of that opinion, we’ll simply resort to looking at the evidence, and the evidence suggests a lower USDCAD, and perhaps that should give us some pause with respect to bearish NZD and AUD. Or, as we’ve pointed out before, perhaps some type of oil disruption, or simply higher oil is in the cards.
The trend is your friend, and this trend is higher. Be a dip buyer in USDJPY over the next several YEARS. The change is evident in both the RSI profile and the ease with which the rally is unfolding. Look for the wave iv low to provide support for a further rally.
The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.