With the unprecedented IMF default from Greece this week, and the tacit admission from Puerto Rico that it is bankrupt, it seems that this credit cycle has peaked. Both are similar in nature to the March 2008 insolvency of Bear Stearns. At the time, The Wolf was short financials (LEH, MER, FED, FNM, etc.), and had been since late 2006 when subprime lenders started to implode.
The reason we mention the similarity, was that the Bear Stearns forced marriage to JP Morgan was the first mainstream realization that the subprime debacle was not even close to contained. Now, we believe that Greece and Puerto Rico have given warning that a bubble in unpayable bonds is about to pop, with far reaching implications for the global economy. Recall that after the Bear Stearns low, many risk markets rallied into their summer tops before additional major implosions occurred (FNM, WM, LEH).
The Wolf has spent years analyzing the credit markets from an Austrian School, Elliott wave and historical perspectives. The reason we continue to harp on the idea that the global central banks have created a junk bond bubble, is that the bond market has been the main transmission mechanism in this particular credit cycle. In previous cycles it was housing finance (’04-’07), tech stocks (’97-’00), S&Ls (’91-’94), LBOs (’87-’89) and conglomerates (’68-’74). But, these unsustainable practices (i.e. financing companies that won’t repay) only matter once lenders reign in their horns. Greece and Puerto Rico are two very high profile examples that may be a tipping point.
Now, on to our Elliott wave currency forecasts.
We mentioned the red up trendline last week, and that it was critical to the near term bull case. Since prices have yet to break it significantly, we’re sticking with the idea that prices will move up in wave (C) or (Y). But, we must remember that the rally up from near 1.05 to the wave (A) or (W) high is not an impulse. As a result, the one larger degree trend is down. As such, we don’t want to fight lower prices on a break of the up trendline, we only want to wait an upside reversal. Do notice that daily RSI continues to suggest that prices are either range bound, or have some upside potential left. One count we haven’t mentioned is that wave ((B)) could be taking the form of a triangle, which would leave both bulls and bears frustrated for another month or two. The big theme we continue to believe in, though, is that there is no “policy divergence” (i.e. The Fed isn’t raising rates because the US economy is too weak.).
But we’re traders, not pure Elliott analysts. So, we’re going to step aside on a break of the wave (ii) low and await a reversal back above trendline resistance. There’s plenty of upside to be had here to await further clarification. Notice that the shorter term RSI is telling a bearish picture, and given the Greek vote, and most uncertain outcome, there’s risk to our bullish call. We’ll be here early next week for a short update if we see something worth mentioning, like last week.
The story is similar, but more bullish here in GBPUSD, as told by daily RSI. Notice that into the wave ((A)) low RSI had a bullish divergence, and it was above the “Sustainable Bear” territory (lower grey zone). Then, into both the wave (A) and 3 highs it made it to “Sustainable Bull” territory (upper blue zone). That has us looking at action down as a correction, and since prices are near trendline and structural support (Nov ’14 lows & (4) high), this is a natural level to look for a turn back up. In addition, there’s no default risk here, so the pound is likely a better pair to play for a reversal of the “USD policy divergence” idea.
While prices are below the short term down trendline, we need to allow for a deeper wave 4 or potentially wave (B) correction. But, with support so close, we’re still going to maintain our near term bullish outlook, although we’re not likely to put any capital behind such an idea until we see a push above the down trendline.
Support once broken, become resistance. As such, there’s plenty of reasons to remain bearish AUDUSD. The count isn’t complete, yet, and the Sustainable Bear reading on daily RSI keeps things pointed lower down under. Perhaps the commodity bear market keeps Aussie rates heading lower, and thereby, eliminating or reducing the interest rate differential. For years, both Australia and New Zealand have had significantly higher rates than the rest of the developed world, in part based on their current account deficits (i.e. they needed to keep rates high to attract foreign capital). With the bulk of Australia’s exports being commodities (coal, iron ore, copper) that bear market is extolling its toll in the forex markets.
We’ve added some short term labels to illustrate the potential downside here. Even if the AUDUSD decline is terminal, a .618 extension off the wave B high points to the .71 handle. The only action that will give us pause, and suggest something less bearish would be an impulsive rally back above the down trendline and .7633. Until then, continue to look lower.
Here too, daily RSI is in Sustainable Bear territory, which means any bounce is likely to be corrective. Still, even a wave (iv) bounce could see a 250 pip rally. Do keep in mind, though, that a Sustainable Bear reading doesn’t mean rallies can’t happen; it only means that a new low will be seen in excess of 75% of the time.We’re not looking to play a bounce here, instead, we’ll be looking to sell the next rally for a trade into the wave C low. Look for the down channel to provide resistance, and the lower line to provide support. In addition, the 100% expansion of the wave B rally is just below current levels.
Even with the sell off from the high, USDJPY is still above both its up trendline from October and the breakout level (wave (3) and B of (4) highs). Daily RSI remains above sustainable bear territory, and given that the last reading was sustainable bull on both weekly, monthly and daily charts we’re sticking with the idea the current action down from the top is corrective. However, the yen has been used as a “funding vehicle” for carry trades around the globe – from John Mauldin and Kyle Bass’ yen mortgages, to Japanese housewives using AUD and NZD deposit accounts, and people coming to the realization that Abenomics outcome is a decimated yen.
So, many people agrees that the yen’s future is doomed. We agree too, but first, we think there is going to be a downward correction towards the 105 level. But, that’s only after one of two things happens: 1. A new high for wave 5 of I is seen, or 2. A break of the up trendline and the wave 1 top occurs.
Notice that last week’s late rally failed right at the down trendline. A break of either trendline will likely point the direction of trade for at least a week or two. Beware a pop and drop after a new high is seen, though, as prices might not have enough left in them to reach the 127 level.
USDCAD bottomed near up trendline and Fibonacci support, and the rally since looks like the resumption of the uptrend to new highs. Critical support is now the wave 2 low, as a break of that level would put us well below trendline support. Until that happens, we’re sticking with the bullish view, and notice that RSI is very near Sustainable Bull territory. Any weakness is an opportunity to join the bulls.
From a shorter term perspective we can see that prices shouldn’t overlap the wave i high. We’re looking to join the bulls on any pullback, as risk is well defined and the upside is substantial. With last week’s break down in oil, the commodity sensitive loonie (along with AUD & NZD) are looking weak, possibly to carve out substantial lows/highs.
Here’s what we know:
- The decline from the wave ((C)) high is not impulsive.
- The pair has been range bound since the “unpeg” low.
- The SNB is willing to do just about anything to discourage inflows.
That’s all we really know. There is a budding up trend, but there are easier ways to play a dollar rally if that’s what’s going to cause the rally here (AUD, NZD & CAD). The reflex seems to be to buy francs on any “negative” Greek news, even though the franc is very far from a “hard” currency these days. It’ll take a break of the up trendline, though, to alter the near term bullish view.
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.