Despite the economic fact that countries can’t devalue their way to prosperity, it doesn’t seem to prevent every country from trying it. As a general rule, a country’s currency follows the productivity of its economy. As such, a strong, productive economy usually results in a strong currency. Of course, a strong currency benefits all citizens who buy imported items, and is a slight hindrance to exporters.
But, in an effort to stimulate already overstimulated economies, global central bankers first tried ZIRP (0% interest rate policy) and are now devolving into NIRP (negative interest rate policy). But, there are limits to what monetary policy can do (it can’t improve structural or productivity problems). In addition, interest rates are a tool to price risk; and as a result of NIRP and ZIRP, too much capital has gone into businesses, that otherwise wouldn’t have been created.
The Wolf believes one of two outcomes are going to take place over the coming five years:
- Central Bankers Double Down – The Keynesian Clowns continue to reign. NIRP and ZIRP are combined with an outlaw of paper currency, or at least heavy restrictions on its use.
- ZIRP and NIRP are Refuted – Economic imbeciles like Bernanke, Draghi and Kuroda are seen for what they are: modern day alchemists using equilibrium models in a disequilibrium world. Central banks are downsized to regulators only and not allowed to tinker with interest rates – or anything else.
Sadly, we think #1 above is substantially more likely. Once cash is banned, barter and private exchange will come back into favor as the only way to anonymously exchange items of value. The Wolf would suggest having physical precious metals on hand for such an event. One might want to acquire it now, as you can imagine what might happen to the price should cash be outlawed.
Now, onto our Elliott wave currency charts.
The overlap of the 1.1000 area leaves the triangle as our top count. The drop below the up trendline isn’t confirmed yet, but the action down from the wave (C) high looks to be wave A of (D). Despite the Sustainable Bull reading, RSI has had no trouble collapsing. We’ll look to become bearish on a bounce back towards resistance around 1.1068 into a wave B peak.
The unrelenting decline this week in the pound should turn more choppy from here. RSI has registered a new Sustainable Bear reading, so any bounce should be used as an opportunity to turn bearish, as the final low isn’t likely to be seen for some time. Allow for an early week low followed by a bounce which should find resistance near the 1.4000 area, which is the wave (3) low and wave (iii)’s fourth wave extreme. A rally into that area is a gift for the bears.
Prices advance quite a bit over the past two weeks, briefly eclipsing the high set on 2/4. But, prices have now reversed sharply seven times since September, after reaching the .7260-.7385 area. We’re going to need to see prices push past that impulsively before believing the rally has legs. Short term, we’re bearish against Friday’s high looking for new lows, potentially reaching the 100% expansion area of wave (iv) which suggests as low as .6530. Perhaps the Australian housing bubble is going to unwind, as it’s at least as big as a percentage of its economy as the US’s was in 2006.
The pattern here is awfully similar to AUDUSD. A Sustainable Bear reading, followed by a choppy bounce fails at resistance. A follow through bar on Sunday/Monday would also break the up trendline. We’re bearish against Friday’s high.
Unlike Aussie and kiwi, USDCAD didn’t reverse on Friday. It continues to see lower lows and lower highs off it’s January peak. There’s plenty of support at lower levels, and if we’re right on NZDUSD and AUDUSD then we should see prices bounce here. But, nothing travels in total parity, and as of now the CAD looks more constructive than do AUD and NZD. Use USDCAD for “weak” dollar trades and AUD & NZD for “strong” dollar trades.
We did have a plethora of Sustainable Bear readings at the wave 3 and (b) lows, which leaves us thinking this rally will fail too – likely near the wave (a) peak. A push past the wave 1 low would alter the way we count the decline, but not necessarily the ultimate bearish outcome. While nothing is certain, even a slight overlap of the wave 1 low would leave an awful lot of overhead supply in the way of a further rally. Look for higher prices, and a reversal bar prior to getting bearish, though.
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.