Our working assumption is that the entire consolidation from the 2015 low is corrective to the upside. Additionally, we potentially have a 1, 2; (i), (ii) count from the May high. Certainly, if that count is correct the downside is substantial. When you add the near perfect 61.8% retracement of the wave 1 decline, resistance at the conjunction of the broken up trendline and down trendline off the May high and wave 2, and Wednesday’s bearish engulfing candle this is a near perfect set up for the bears. That is, while the wave (ii) high is intact. A move above that level could mean that a three wave correction down from the May high was complete, and could even mean something bigger picture bullish. But, for next week, we enter as aggressive bears.
The initial action up from our wave 1 low was a five wave move for (a), and (c) is not an impulse. So, either wave (c) of 2 is an ending diagonal that’s complete, or some other pattern is taking place. Nonetheless, notice the behavior of RSI which failed at 50 after registering multiple Sustainable Bear readings (lower grey zone) near the wave 1 low. With QE-insanity by the BOE (buying corporate bonds!) we now have our answer as to whether Brexit would be a longer term positive for GBP or not. The overwhelming consensus was that it was GBP negative, but keep in mind that prior to last week’s announcement the BOE was running a much tighter policy than the ECB, which was already buying corporate bonds.
Here’s a question for all those central bankers who think QE is a positive for economies. If QE worked, why hasn’t it worked yet? At best QE allows economies to refinance debt at lower rates, but if that “refinance savings” is squandered (i.e. not saved), then all one has done is changed the spectrum of payments going out. At worst, QE’s “refinance benefit” serves the purpose of bringing forward future consumption. It’s amazing that not 1 in 10 people understand this. In fact, The Wolf had a conversation with a multi-billion dollar Boston-based fund manager in 2014, who I asked how much future consumption the Fed had brought forward. His response….”none.” Incredible. It seemed as if he’d never even contemplated the concept of artificially low interest rates pulling forward consumption.
Not only does QE do that, but it also incentivizes companies to issue debt – and they’ve done a bonanza of that, like Microsoft’s $20 billion dollar debt sale this past week to partially fund its awful purchase of online want-ad company Linked In. Well, over the next couple of years Linked In will likely have a lot of applicants, even if there’s not many jobs to place them in.
We think AUDUSD is going to turn down, but our best guess is one more shot to the upside, first. That’ll change if the red up trendline gives way though. Notice RSI is still langushing below Sustainable Bull (upper blue zone), so we continue to think lower is going to win the day, but Aussie is showing decent relative strength.
NZDUSD has given up the leadership baton, and we think the wave (ii) top may be in place here. We are aggressively bearish against Friday’s high, and while there’s support at lower levels, we think the entire structure up is corrective. We’ll look for the up trendline and wave (i) low to provide some temporary support should prices reach those levels over the next couple of weeks.
I’m not sure how many ways I can say this chart is ugly from a trend follower’s perspective. We see little to go off of here. The action up looks corrective, but near term support at the short term trendline likely means higher prices to come. And, if NZD and AUD are going to breakdown, perhaps there’s commodity softness coming (on the back of economic softness? gasp!).
It’s amazing to me that people can ignore Japan’s lack of economic success given its incredibly loose monetary and fiscal policies of the past 25 years. Why hasn’t it had a more robust stock market if 0% rates are such a magic tonic? The standard response, “the US is nothing like Japan.” Yeah, right – Japan began its stock and real estate busts in a much BETTER position than the US did. It had a huge trade surplus, current account surplus, tremendous savings and little debt.
Yet, today the yen is stronger and its stock market weak. That will change, at least the stronger currency part. It has boxed itself in, and once the currency starts to weaken, it’ll face problems like the US did in the 1970s – nothing will stop the tremendous inflation pressures, other than perhaps a global depression.
We still have a few wiggles left prior to a lasting low, but we’ll be looking to establish some long term aggressively bullish USDJPY positions in the not too far distant future.
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.