Entering Capital Preservation Mode

We’ve made the case for well over a year now that our “dollar strength” theme, is more like “other currency weakness” than any “policy divergence.” In other words, it’s the underlying weakness in European and Asian economies that are allowing their currencies to fall against the dollar; as oppossed to dollar strength coming from the Fed tightening policy. More likely the coming USD strength is due to unwinding hidden “carry” trades. The concept of TINA (There Is No Alternative to stocks) is a great example of the hidden carry trade. Many people own US stocks because they have a positive carry (i.e. a dividend yield of 3-5%). Of course, if your stock falls 20%, that’s 4-7 years worth of dividends, and at a major economic, and stock market, bottom people will be worried about preserving capital, not collecting dividends.

EURUSD

EURUSD
The Euro’s Collapse Is Underway

The euro had a brief spike on Thursday to complete a second wave. We warned about EURUSD strength in a second wave, and Friday’s collapse suggest its complete. We did up the degree one level, and a small wave (ii) bounce is due, but we are aggressively bearish looking for a move to below parity, and perhaps it’s going to be a big move below it. RSI has registered yet another Sustainable Bear reading which confirms our bearish view. There may be some temporary support around the 1.08 level, which is some temporary structural support, but as long as prices remain below the wave 2 high, we’re looking for a move lower straight away.

GBPUSD

GBPUSD
Triangle Makes Sense

Given the extent of the drop post-Brexit, a triangle for wave ((4)) makes perfect sense. Triangles eat up a lot of time, and a general sideways move would allow the Sustainable Bear readings in RSI to subside enough to allow for a bullish divergence into the wave ((5)) low. The trend remains down, but it looks like we’ll spend a little more time in wave (E) prior to something significant happening on the downside. Even then, we’re not anticipating GBP leading to the downside. That said, we’re not stepping in front of this train.

AUDUSD

AUDUSD
Aussie Reverses From Resistance

Aussie poked it’s head above our previously labeled wave (ii) high validating our suspicion about the count. Thursday’s violent reversal from below the wave 2 high leaves the top count intact, although we may have completed the alternate count’s wave 2 high with a truncation as well. Either way, we’re now bearish against the wave (ii) high. Notice that RSI didn’t enter Sustainable Bull territory (upper blue zone) which suggests the rally isn’t sustainable. It’ll take a full five down, three up correction for us to get aggressively bearish again.

NZDUSD

NZDUSD
Kiwi is Undecided

The rally up last week overlapped our suspected wave (i) low. In addition, the rally appears to be in five waves, which means the rally isn’t likely complete. We’re a bit confused on how to count the decline in a bearish manner, which means the immediately bearish count is likely wrong. We’re going to wait for clarity rather than throw out too many guesses on which direction this one is headed, because that’s exactly what they’d be – guesses.

USDCAD

USDCAD
CAD Weakens Further

Well, certainly, our count last week was off. The question is whether we’re about to complete wave (c) to the upside, or if something larger is developing. RSI should help decide its fate this week, and until we see a clear wave pattern, we’ll stand aside here too.

USDJPY

USDJPY
Major Bottom Near

USDJPY still hasn’t tipped its hand. Japanese stocks were strong last week, breaking the recent consolidation, but the currency hasn’t. Even as the Chinese yuan continues to weaken, perversely the yen has remained fairly strong, especially given its untenable debt and central bank positions. When the yen weakness starts its going to get ugly, but we can’t confirm its start yet. We’re not bearish here, more like, “waiting to turn bullish.” A push above 105.50 will likely activate the alternate as it may push RSI into Sustainable Bull territory. We’re not going to ignore a signal like that at this juncture.

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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