Brexit is Bad News For EU’s Overpriced Bonds


Reverses Down From Key Level

We suggested that the 61.8% Fibo level would be helpful to the bearish case if our top count was correct. Indeed, the sharp reversal from that level keeps our top count intact. Now, we can use the wave 2 high as our risk control for both trading, and our top count. Should prices push above the down trendline off the wave ((X)) top, and wave 2 high, we can set aside bearish views for the time being. But, the wave 2 high is really the critical resistance, and given the position of RSI, heading below 50, any early week bounce should prove to be corrective.

Contrary to many beliefs, that a Brexit is bad for the pound, a Brexit may actually be worse news for the euro. Because, if the UK can exit the EU, then other Eurosceptics (like the Five Star movement in Italy, Marie Le Pen in France and the AfD in Germany) will likely gain momentum. For those who own low yielding euro sovereign debt, any significant drop in price (increase in yield) toward Portuguese or Greek levels could be devastating from Friday’s closes:

  • Germany 0.02%
  • France 0.39%
  • Italy 1.38%
  • Spain 1.42%
  • Portugal 3.07%
  • Greece 7.34%


Pound Falls Hard

Last week’s failed rally in the pound leaves it under pressure. While we may remain range bound until the coming vote on 6/23, the action up from the wave (3) low is a very clear three wave, corrective rally. Last week saw prices close below two up trendlines and while some support may be found at the longer term broken down trendline, ultimately we’re looking for that to prove to be temporary. RSI confirms our negative outlook.


Sharp Rally is Corrective

We thought that wave 2 might be contained by the down trendline, but that was off base. Wave 2 retraced 50% of wave 1, and the only question is if the corrective rally is over. Wave 2 would look better with one more new high, but with Thursday’s reversal and Friday’s follow through, we’re not sure if we’ll get it. Still, there’s only three waves down from the wave 2 label currently, and without overlap of he .7299 level, it’ll be impossible to rule out one more stab higher. Be patient here.


Kiwi Spikes Higher

Here too, it seems that we’ll see another push higher prior to a resumption of the down trend. Thursday’s push to a new high was accompanied by a Sustainable Bull reading, which means Friday’s decline is likely a correction that will lead to another wave higher. But, we still see the action up from the low as corrective that will at least lead to a retest of the lows. At this point, only a break of .6834 would eliminate the possibility of further gains.


Down to Complete Move

We continue to think lower in USDCAD, but it’s not with much conviction. The reason is that we could see a range type of environment develop over the coming months to set-up the next big move. So, a larger B wave is possible with prices bottoming not much lower than current levels. Still, the Sustainable Bear readings, and the lack of Sustainable Bull into the wave B top allow for sub-1.2500 to complete C. We’ll reserve a strong opinion, other than to say the current trend is down, and we can argue for one more small down wave at a minimum next week.


Bottom Not in Place, Yet

Recall the sentiment when oil hit $26/barrel. It was, “the Canadian dollar is doomed on the back of lower commodity prices.” Fast forward a few months, and commodities are the best performing asset class of 2016, so far. It’s now becoming common knowledge that the yen is a “safe haven” rallying when risk markets sell-off. But, have you noticed that the S&P 500 is near all-time highs and the yen has rallied the whole time? So, understand that correlations change.

We’re still looking for one more new low to complete the larger decline, but we may see a larger rally first, since we think wave 5 is an ending diagonal, and therefore wave (v) of 5 should develop in three waves.

Happy Trading!

The Wolf

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.

About The Wolf

Twenty years is a long time to be involved in the trading business. Through many battles in every asset class known to man, knowledge has been gained; and, this project is a way to share that knowledge. The Wolf is a big fan of repeatable market work, or the creation of a “process.”

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