ZIRP No More, Dollar Into a Top

Well, the Fed finally did it, hiking rates up to .25%. Now, most Fed watchers are suggesting that rates will hit .75% by the end of next year. Yeah, and all of those Barron’s “expert forecasts” suggest that the S&P 500 will hit 2200 next year on the back of $125 in earnings. Things are set up perfectly for a bit of continued dollar strength on the back of this policy “tightening.” But, does anyone recall the idea of “three steps and a stumble?”

The idea of “three steps and a stumble” is that once the Fed raises rates three times, the market and economy stumbles. Well, guess what, the removal of QE support was step #1, and perhaps #2 too. This measly 25 basis point hike is the #2 move. So, only one more hike would set the economy and markets up for a vicious slide. I certainly wouldn’t want Janet Yellen’s job in 2016.


EURUSD daily chart
EURUSD Fails Below 1 Resistance

The euro failed below cited resistance at the wave 1 low. We’ll stick with the bearish count as long as prices remain below the wave 4 high. Notice that RSI failed to reach Sustainable Bull territory after registering Sustainable Bear readings into the wave 3 low. A push above the wave 1 low would likely mean the alternate count was playing out, or that a triangle was developing. Until then, we’ll expect new lows on the back of interest rate/economic optimism in the US. We think that’s misplaced, and that a drop to a new low will be short lived, but we have plenty of time to talk about that after we see the initial forecast come to fruition.


GBPUSD daily chart
Breaking Support

Similar to EURUSD, the pound failed at resistance, and it’s a bit further along in its break of support. The pattern has a couple of options down from the wave ((B)) high, including a leading diagonal, but the bottom line is that there is a very clear series of lower lows and lower highs eversince the wave B of ((B)) high. The action in RSI confirms our count, and there’s little reason to be bullish here. Use a bounce to turn bearish, if you’re not already. We may see some temporary support near the wave (iii) low, which could be a trough in momentum as well. Same story with the euro that we’ll start to worry about how low the pair will go once we actually see a new low print.


AUDUSD daily chart
Trading Range in Effect

It’s hard to be bullish AUDUSD considering the first two pairs. And, we do only have three waves up from the low. So, should prices break the wave ii low, that would mean that the larger trend was still down. One could make a short term bearish case as long as prices remain below .7281. Critical support for the bulls is the wave ii low, and a break of that would almost guarantee a new low was coming. Notice that RSI didn’t push into Sustainable Bull into the December high, which casts serious doubt on the sustainability of the current rally attempt.


NZDUSD daily chart
Failure to Launch

The kiwi has mimicked the Aussie in its action of late, and the outlook is the same. RSI hasn’t confirmed bullish action, but that would change on a push above the wave i high. Until then, dollar strength is likely to force a retest of the lows. Watch the up trendline, as a break of that would turn us from neutral to favoring a bearish take.


USDCAD daily chart
The huge rally isn’t complete.

We certainly caught a huge bullish move here, but USDCAD has now blown totally through our target zone from the 100% expansions. In addition, RSI is well into Sustainable Bull territory with not even a whiff of divergence. That means that the next decline will likely be yet another bullish opportunity. We’ll look for support in the prior fourth wave, red up trendline and the broken line drawn off the wave (3) and 3 highs. One of The Wolf’s New Year’s Resolutions is to allow winners to run more in 2016. Never expect trades to turn right around at targets, especially once they’ve broken through virtually all resistance. That may be particularly important in our next pair.


USDJPY daily chart
Sideways Range Continues

We don’t have any clarity with respect to the near term, or longer term count for the yen. One of our favorite fund managers recently made a move to flat the yen, despite his longer term target of infinity for USDJPY. In other words, he thinks Japan is headed for a currency crisis. Given its debt, and the broad acceptance of ZIRP, QE and deficit spending, there’s little doubt that any economic weakness in Japan will be met with even more monetary madness. But that’s long term. Shorter term, we will note that USDJPY has basically traded sideways for more than a year now. In technical analysis, there’s a saying that, “Consolidation means continuation.” So, rather than the sideways action carrying bearish tidings, it’s actually just setting up a base for another move higher, and this move higher could be a stunner. We’re not ruling out that wave II may still be in progress in a flat correction, per the alternate count. But, we’re not going to get anywhere near long the yen, considering the next move higher is likely to head towards 150-200.

Happy Trading & Happy Holidays!

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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