We remain on the side that this consolidation is corrective in nature, and that a collapse is coming. The European banking system is woefully under capitalized, and the bailout structures aren’t in place. We have little doubt that the ECB and Brussels will cobble a system together once it’s deemed necessary, but the problem is that there will be massive confusion and doubt before the central planners can patch things together. By then, social mood may have completely turned negative, and as such, ever more loose monetary policy will result. Parity, and even lower seems highly likely.
That’s the case whether the top count, or the alternate, is correct. A push above the down trendline would be a warning that we’re off base, although it’ll really take a push above the wave A high to suggest that the consolidation is actually breaking to the upside. Don’t fight the breakout either way, because this pair has been consolidating so long that whichever way it breaks, prices are likely to move in almost a straight line.
Only a real contrarian would like the pound at this point. The sideways consolidation looks complete for wave 2, and as such, it’s stiff resistance. Any bounce is a bearish opportunity. We think that the pound will potentially soften less than the euro, although Lloyd’s and Barclays don’t look much better than Deutsche Bank. Regardless, we see no reason to look higher here. The consolidation’s 100% expansion points to the 1.2200 area.
We can’t commit to the bearish case in Aussie, yet. Each time it has reached the mid-.77 area it has failed of late, and that happened this week, again. But, the action down from the suspected wave 2 high isn’t convincing as of yet, and as an astute reader points out on NZDUSD, we can’t rule out a push higher prior to a major top.
We had an alternate shown on AUDUSD last week, but we neglected to point out the alternate in NZDUSD. While we favor the idea that the top is in place, we certainly can’t be sure. Next week should tell the tale, though. And, the wave (ii) high separates the bearish and bullish case. We’re continuing to look for a big breakdown, but support still exists at lower levels. A drop below the .7200 area would leave the bulls on slippery footing, though. Until then, we do have to allow for one more challenge, or even stab above the September high.
One contrary piece of evidence that AUD & NZD have topped is USDCAD. The pattern down from the wave (5) high looks impulsive for (A), and the action up since looks complete for (B). That would mean a stronger CAD in wave (C) down coming. It’s hard to believe we’re going to get a much stronger CAD while AUD & NZD weaken a lot…unless…the oil markets are disrupted. We do think oil pushes into the $55 area, and if that happens on some type of geopolitical event, then you could see CAD strength as Aussie and kiwi weaken. We’ll see.
A major bottom is close in USDJPY, if it isn’t already in place. The market must prove the low is in place by pushing above the red down trendline and the wave (b) high before we change our view that one more stab lower is coming. Wave 4 could be taking the shape of a triangle, so a temporary break of the red down trendline isn’t enough to prove a major bottom has been struck.
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.