Do Dramatic Moves Suggest Further EU Breakup?

The Wolf suggested traders take the week off, and despite the dramatic moves, one could have made the case that was the thing to do for swing traders, although it was a day trader’s paradise. Now that Brexit has come and gone, literally, what does that mean for currencies, and more broadly economies, and the politicians that think they have a modicum of control.

Here’s the thing with politicians and central planners (including “central” bankers): they see themselves as facilitators. An introduction here, a tax break there, an adjustment of interest rates over there, and WALLAH – economic growth. Unfortunately, politicians and central planners/bankers, and most people, misunderstand something fundamental about economics. Economies progress by coming up with better, faster and cheaper ways to accomplish tasks. So, by their very nature, economies grow by supplanting the status quo.

Take Uber for example. Uber came up with a better, cheaper way to transport people from point A to B. Uber’s success allowed customers to save millions of dollars that otherwise would have been spent on cab fare, and part of that savings was Uber’s profit. But, think of all those yellow cab drivers who had money and their livelihoods vested against Uber’s success. Ah, but then think of all of those dollars saved by consumers that they were then able to direct towards savings, or some other consumption item.

The economy is better off with Uber than the old way of doing things. But, progress is a bit messy, and it’s this messiness that politicians and central planners attempt to smooth over. However, since pols don’t create anything, virtually every attempt made to intervene will simply add a cost to the system. The best thing they could do is nothing, but that’s not the way they see themselves, so don’t count on it.

In the end, Brexit might not really change much. Yeah, the UK isn’t part of Europe, but is it a bastion of free market capitalism, or is it still a government heavy bureaucracy, like the US?

On to the Elliott waves:

GBPUSD

GBPUSD
Pound Breaks Support, Headed Lower Still

Well, there’s no place for structural stops within reason, but we got the “big” move right, eventually. Last week’s alternate was obviously playing out after the early week hope of Bremain. It’s hard to believe that the low has been seen, given the strength of the move, and the fact that the UK does now face several challenges, not the least of which is the weakly capitalized banking system, assuaging fears and keeping access to export markets. The 7% of GDP current account deficit doesn’t help GBP either. With the Sustainable Bear readings, any bounce is likely to be corrective, although we certainly could see some short covering bounces. We’ll likely steer clear until something very actionable presents itself.

EURUSD

EURUSD
Brexit Exposes European Discontent

We mention before that Brexit could actually expose the real fundamental flaws, and splintering social mood throughout Europe. In fact, all four of the PIGS (Portugal, Italy, Greece and Spain) bond yield moved higher on Friday, which suggests fresh doubt about the sustainability of the EU, or at least a weak member state or two. Politicians in the Club Med countries would love to gain access to the printing press again, as if the ECB’s shenanigans haven’t been enough. Our advice to the PIGS: get lean, create, produce and improve; don’t attempt to run your own monetary policy again – you weren’t that good at it.

Mp Sustainable Bear reading yet, but notice that wave 2 stopped right at the 61.8% Fibo of wave 1. That’s a clue that the trend is down, and while we could see slightly higher, the rally up from the low appears corrective.

AUDUSD

AUDUSD
Aussie Bounces From the Low, But…

We have five down from the wave (B) high, with three waves up into the area just beyond 61.8% of 1. So, we’re going with wave 2 has topped, although the huge bounce from Friday’s low is impressive. And, that bounce happened from an area that has been important to prices since the wave 3 of (A) low. We still think AUD is headed for a new low, but a push above the wave 2 high will cast that suggestion aside, as something else is likely brewing. Confidence isn’t high.

NZDUSD

NZDUSD
Kiwi Reverses, But Strong Intraday Bounce

Kiwi reversed down near where we thought it would, but the decline didn’t last. In fact, with the daily Sustainable Bull readings, we do need to allow for further gains. But, the weekly chart doesn’t show the same Sustainable Bull readings, so we’re sticking with our top count. Like Aussie, though, confidence isn’t high.

USDCAD

USDCAD
Top Count on Track

It does seem USDCAD is trying to stay in its recent range. Perhaps wave (c) will be fairly small, or wave B could even trace out a triangle. Regardless, it seems this pair is buy dips, sell rallies as the range seems likely to persist to give the pair time to consolidate both last year’s gains and this year’s decline.

USDJPY

USDJPY
Yen Strong, Can’t Make BOJ Happy

The Wolf has no doubt that at some point we’re going to see the yen change its correlation with risk assets. The “safe haven” yen buying will disappear, and the monetary madness in Japan will take center stage. The trouble is, we have no idea WHEN that will occur, and it certainly hasn’t yet. We mentioned patience last week, that we could see a return to 100.00 – well, little did we know it would be a few days later. RSI is diverging, but it registered a Sustainable Bear reading, so most likely, the next bounce will be fully retraced. It’ll take a rally back above 105.00 in an impulsive manner to suggest otherwise.

The Wolf will be on vacation next weekend, so there will not be an update.

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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