As we’ve written many times here, “Policy Divergence” is a US dollar bull fantasy. This week, as risk markets became unglued, the probability of a rate hike in September is around 30% based on the Fed Funds futures market. In fact, there’s now only a 50/50 chance of any rate hike this year. Add to that the fact that the S&P 500 isn’t far from the October 2014 “Bullard low” where the Fed felt it necessary to discuss QE4. At some point the Fed will show its true colors and another round of QE will be implemented – as sad as that is. So much for those vaunted rate hikes and Charles Plosser’s “3% Fed Funds by the end of 2015 forecast.”
QE doesn’t “work.” And, by work I mean improve the economy. What it does is distort the most important price – the price of money. I may never win “Man of the Year” from Time magazine, but I know something our former Fed chairman (and its entire board now) doesn’t. Quantitative easing actually makes problems worse because it sends false signals to the economy, that things have improved. Companies and individuals have been making decisions for the last several years on the idea that the Global Financial Crisis is over. But, it’s not. There’s another shoe to drop, and that shoe is going to be a bursting of the Junk Bond Bubble. Make no mistake, the global economy is in trouble, and last week’s breakdown is just the start. We’d suggest preparing portfolios for a substantial decline in risk assets (40% decline isn’t out of the question).
Now onto our Elliott wave currency counts.
It took until Wednesday, but the early week decline and then rally we suggested was exactly what played out. Notice that prices are now testing resistance from the May and June highs, along with the upper parallel of the base channel. This rally isn’t complete, though, and we remain bullish. Notice that daily RSI is just under “Sustainable Bull” territory.
Yes, we know the wave i high is far away from current prices. But, it shouldn’t be breached until prices have pushed much higher first. That’s the critical support for our bullish view, although ideally prices will remain well above that level. There’s still resistance overhead, so prices will need some backing and filling next week, but we’re dip buyers.
The pound’s rally certainly didn’t measure up to the EURUSD, but that’s not to say it wasn’t bullish this week. In fact, on the weekly chart (not shown) this week completed a weekly buy signal bar, to go with the prior week’s reversal bar. That means we can hold a very aggressive bullish view while prices remain above 1.5458. We don’t think prices will be anywhere near that level in a week or two. Be bullish.
What’s most important on the shorter term chart is the clearly corrective action to the downside shown in both wave (ii) and 2 (And E, and C, you get the idea, right!). We won’t be surprised at all to see the pound play a bit of catch-up with the euro to the upside next week. We remain aggressively bullish. A break of the wave (ii) would give us pause, and would potentially suggest that the wave (B) triangle was ongoing, rather than something more bearish. Even under that view, prices will remain above the 1.5400 area on their way towards 1.6100 (or higher). Do notice that 1.5700 has been resistance lately, and any push above there may serve to panic the shorts (On any hint of no Sept rate hike or QE4 perhaps.).
Now, what’s most interesting is that AUDUSD didn’t fall to a new low as the signs that the global economy is weakening became apparent this week. Remember that AUDUSD has already fallen a long way from its 2011 high (about 35%), and so a bounce isn’t out of the question. What could cause Aussie to bounce as the global economy weakens? How about more monetary easing from Australia’s largest customer, China, or how about easing monetary policy in Australia? Wait, isn’t that heresy? How could monetary easing actually benefit a currency? Ask the euro after Mario Draghi’s “whatever it takes” speech and bailout of Greece. Both were forms of monetary easing, yet the euro rallied from 1.20 to 1.40 after those “easing moves.” Remember, be careful of relying too much on causation, and instead let the charts do the talking. We can’t rule out one more stab lower, but Aussie should be near a bigger rally phase, and that’ll be sealed on a push above .7600.
The decline from the .7360 area is corrective, and the bounce from .7200 looks impulsive. That means we should see a near term rally regardless of which count is operative. Be bullish towards the .7440 area early next week, and possibly beyond considering the weaker US dollar we’re expecting.
NZDUSD showed several bullish divergences into the wave C low, with the final one occurring ABOVE Sustainable Bear territory (lower grey zone). We mentioned at the time that we needed to pay attention to this divergence, and last week showed why. Prices have now pushed higher, with RSI above 50, and we’re expecting it to continue.
Don’t stand in the way of higher prices on the shorter term view either. We think wave i of (iii) was a leading diagonal, and prices should soon push the upper boundary of the base channel. Only a drop back below the .6600 area will call into question our bullish view.
Under both the bullish view and the top alternate, prices are headed higher from above the 1.2925 area. The line between the two counts is Wednesday’s low 1.3024. We have five waves up from 1.2952 into 1.3152, with a correction into Wednesday’s low. Remaining above that level means wave 5 is underway already. A break of that low means that a triangle of flat correction for wave 4 is the operative view, and considering the strength we’re looking from for AUD and NZD, perhaps that makes more sense. The pair to play any USD strength is USDCAD.
Prices have now returned to the breakout level, which means they’ve really gone nowhere since December, similar to the S&P 500. There’s little reason to believe that prices are going to stop here, though given the big bearish bars the last three days. We’re going to be sellers of any bounce, partly based on the action in daily RSI. Notice that into the wave B high, RSI turned down from the upper grey zone, which is the “bearish resistance” zone. Now that RSI is back near Sustainable Bear, there’s little reason to think prices are going to turn back up on a dime, although we can’t completely rule that out until the wave 4 low is taken out.
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.