To many, the fact that the Federal Reserve pushed out its rate hike plan till later this year (and lowered the longer term NAIRU rate) came as a bit of a surprise. After all, employment, GDP and the stock market suggest that things are seemingly fine enough for a measly 25 bps hike. But, the Fed is content to err on the side of policy being too loose, rather than risk the “1937 mistake” of tightening policy too early. We put that in quotes, because the Great Depression was going to be lengthened regardless of monetary policy. Just like today, a recession is going to happen whether or not the Fed Funds rate is 0% or 2%. Sometimes, macro factors are just too powerful for policy makers.
The Wolf continues to be in the “lower for longer” camp, which suggests policy normalization will simply not occur. In fact, QE4 is more likely than a 2% overnight Fed Funds rate, because the world has too much debt to afford higher rates. Ironically, a global recession is exactly what’s needed for the economy to right itself. That’s because there’s too much spare capacity for the underlying productive capacity of citizens to sustain. But, a recession is not politically acceptable to the “masters of the universe” that think their policies should dictate economic performance.
In reality, tight or loose monetary policy shouldn’t be a political topic. Neither should the level of the federal deficit. The US economy would be much better off having the Taylor rule set Fed Funds and a balanced budget. The problem is, that if both of those were instituted today, the recession would start tomorrow. Once you’ve built up an unsustainable debt load, sane policy goes out the window, and you’re only left with bad choices. That’s the reason to never let policy get out of whack to begin with.
Now on to our Elliott wave currency forecasts.
So, the Fed delays hiking and the dollar rallies? You may recall 2008, where the strongest currency in the world was the Japanese yen. It wasn’t strong due to tighter fiscal or monetary policy, instead it was a “carry trade unwind” play. Will that be the reason for the dollar to rally today? There’s no doubt a ton of money has been borrowed in dollars.
The rally this week was steep, but Friday’s bearish engulfing pattern leaves a corrective looking bounce. We are now aggressively bearish against Friday’s high. A push above there would likely mean that the alternate wave (Z) to the upside was unfolding. If not, look out below for risk markets. Notice that RSI failed to reach Sustainable Bull territory, which is likely a tell that a new low is going to be seen. In addition, the entire structure up from the March low is hardly inspiring for the bulls.
Notice prices reversed from between the 61.8% and 50% retracement zone. Above there and near term bears are likely wrong.
Same story in GBPUSD. We’re bearish against Friday’s high. A push above there likely means prices are going to push towards 1.6000 before rolling over. RSI suggests that this bounce is corrective though and that maybe we’re going to get some bearish news out of Europe? More populist politicians in Greece or Spain perhaps threatening default? Don’t be surprised to see that back on the table.
The rally was deeper in GBPUSD, and it’ll take a drop below the wave b low to be certain the rally is corrective, but that’s our view right now. We can use Friday’s high as a low risk, high reward type of set up, because if the count is right we’re going to see much, much lower prices. However, if prices exceed Friday’s high, then it’s likely that the early September low was the end of a (B) wave with prices headed towards 1.6400 in (C) of ((B)).
We’ve left the count in place more for convenience sake than certainty about a new low. With EUR and GBP looking weak, will AUD really be able to start a new bull? The overlap of the wave i of (v) low, 100% expansion target hit and push above the channel say yes, but the lack of divergence and the Sustainable Bear reading into the low say no. We’re about 50/50 on this, although if the dollar is going to weaken we like AUD and NZD to lead in a massive short covering rally. The early week action should give us a clue.
Unlike AUDUSD, kiwi did show bullish divergence into the low and a snapback rally from an oversold level. But, the action since has been uninspiring for the bulls. The fact that prices are still below the trendline and the wave (iii) low suggests tough sledding ahead. But, if we’re going to see a strong dollar on risk aversion, it’s tough to imagine NZDUSD bucking the trend. We like short Europe versus USD early week, and if that doesn’t play out impulsively, perhaps long NZDUSD and AUDUSD late week.
Yes, it’s gross to be bullish something that’s eventually going to end up in the dustbin, but that’s the case right now. At least, it’s the case while prices are below the wave C high. A push above there would suggest a retest of the broken trendline, like we discussed last week, or something more bullish. Until then, USDJPY looks lower, after an early week bounce, which suggests trouble for risk markets. Is the junk bond bubble going to unwind with a spectacular bankruptcy this week?
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.