The euro has bounced from support just above parity, although we think this bounce is corrective. Given the impulsive nature of the US equity rally, it seems that the policy divergence I’ve so often mocked, may actually prove to come to reality. Certainly, a couple of .25% rate hikes by summer may be the exact tonic that gets us below parity. We’re continuing to look lower after a near term pop higher to complete wave 2 of (2) of ((C)) to the downside; or, less bearish wave (4) of an ending diagonal for wave ((C)) that began at the August high. Both counts call for a push int the 1.07 area prior to a drop below parity.
Should we push past the wave (2), that would eliminate the top view as a possible count, although it wouldn’t eliminate the ending diagonal. Near term, we’re not so much bullish, as expecting a slight push higher over the coming week or two.
We continue to think that the pound will out perform the euro. The ECB has to deal with an underfunded banking system and a bailout arrangement with parties that have different interests. At least the BOE doesn’t have the latter. There’s a clear five down from the wave ((4)) high, which we think is wave (1) of ((5)). However, it’s possible to count that low as the end of the entire decline. It’ll take an impulsive rally to get some price action behind that thought, but keep it in the back of your mind. We’ll look to use the pound for dollar bearish bets and the euro for dollar bearish bets, which suggests further downside for EURGBP.
It’s safe to say I was way off here. Rather than a small corrective bounce, Aussie has blasted higher over the past two weeks. That impulsive rally isn’t complete yet, and we’re likely only to get a small corrective decline after that. The bears can hang their hats on the larger bearish view that a triangle is unfolding which will end near .7600, but note the alternate count which calls for a much larger rally towards .8000 prior to more downside.
Perhaps I’m capitulating at the exact wrong moment, but we can’t call the action down from the September high impulsive. Instead, it looks like a completed double zigzag down. That means the entire decline should be retraced. We’ll worry about fitting it into the larger count at a later point. What’s important over the next several months is that a push towards .7600 looks likely. If instead, prices collapse below the December low, that will likely complete a leading diagonal down, and a bounce back towards current levels would follow. So, that, combined with AUD’s count likely means a further rally in risk assets or perhaps a lack of problems out of China.
Well, now it’s clear why we’ve had a bullish count for CAD! This is a perfect example of why you must keep counts individually rather than always trying to apply a “theme” in global macro. It’s nice when themes line up (dollar strength, risk on/off, etc.), but we’ve been looking for CAD strength, despite our commodity currency bear counts on AUD and NZD. Well, the AUD and NZD counts turned out to be wrong, while USDCAD was spot on. A bigger decline is coming after a small corrective bounce for wave 2 of (C) to the downside.
Wave 1 likely completed with a 6 pip truncation into the January 3 high. Even if we alter the labels to call the December high the wave 1 top, the path is the same – down into a wave 2 low. This correction is likely to last at least another couple of weeks at a minimum. Still, we don’t want to be placing bullish yen bets. Instead, it’s now time to start looking at the 150.00-175.00 area as the next level in USDJPY. This may indeed take a year or two, but we’re confident that the BOJ and Japanese government have laid all the necessary groundwork for a complete currency collapse.
For some reason, many otherwise intelligent people don’t seem to see the downside in having central banks (like the BOJ) interfere in the capital allocation process that is the capital markets. The downside in having a central bank (like the Fed, BOE, ECB and SNB) buy assets with electronically created currency is that it sends the wrong signals to economic decision makers (including business owners, consumers and students). Students you ask? Why yes. There’s many people currently working in the investment/finance world whose talents were drawn there by the fact that central banks constantly propped up markets by lowering interest rates (Thus, creating very highly paid, low productivity positions). Had the central banks not done that, and instead pursued a “non-inflationary” policies, many college educations over the past decade would have spent time in medical research, AI, robotics, etc. rather than in financial planning, high speed trading and other lower productivity, zero sum game type of positions.
These transformations are the unseen, Bastiatian “broken window” type of economic changes that go unnoticed by the Paul Krugmans and Ben Bernankes of the world. The amount of capital misallocation that has happened across the globe, and in Japan in particular, dwarfs the 1920s and 1970s. We just hope the unwind in 2018 won’t be as bad as we think.
Bonus chart: S&P 500 Update
The bulk of the gains may have already been seen, but the near term action isn’t bearish. Declines should be corrective, holding critical support at the wave (i) and (1) highs. The lower of the two is near 2100 and it’ll take a break of that level to suggest something more immediately bearish is unfolding.
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.