Head and Shoulders
As Citi's Tom Fitzpatrick, a number of local market currencies are increasingly coming under pressure and look likely to fall even further. Whether this will turn into a dynamic as severe as 1997-1998 in unclear; however, at minimum Citi believes the “change in course” by the Fed in December (guided since May) has become a “game changer” for the EM World. The greatest monetary experiment in the history of the World is being wound down. In a globally interlinked economy it would be “naïve” to believe that the big beneficiaries of this “monetary excess” in recent years would be immune to the “punch bowl” no longer being refilled constantly.
EURUSD has topped out, BofAML's Macneil Curry notes, as the break of 1.3548 confirmed a bearish turn in the medium-term trend, targeting 18-month trendline support at 1.3144. Furthermore, Curry warns, longer-term charts suggest this could be the start of something significantly more bearish - targeting the 200-month average at 1.2187. Despite this USD strength, Curry adds, gold remains curiously bid and could squeeze to $1,399.
Overview of the dollar's outlook against the major currencies, without a preconceived notion that the US is in some kind of terminal decline.
USDJPY's medium-term trend has turned from bullish to bearish. BofAML's Macneil Curry warns that the break of the old May highs suggest weakness should extend further with the 200-day moving avarege at 99.71 as a minimum downside target. Given the JPY's weighting in the USD Index basket, this does not have specific bearish USD implications but does have significant effect on equities as the JPY carry trade comes under pressure.
US Treasury yields broke down sharply Friday, confirming a near-term, potentially medium-term, turn in trend; and, as BofAML's Macneil Curry notes, this Treasury turn should prove to be a headwind for select USD pairs, (although BofAML remains bigger picture USD bulls); particularly USDJPY. However, the weakness in the Canadian USD - which was the only currency not to rally against the greenback on Friday - suggests the downtrend in the Loonie has significant legs. Precious metals - most notably silver - could also benefit from the Treasury trend change.
Treasury bears are at risk, is the ominous warning from BofAML's Technical Strategist MacNeil Curry, as bonds are on the verge of turning the near-term, and potentially medium-term, trend from bearish to bullish. USDJPY bulls should also take note as with the 3-month uptrend increasingly showing its age, a reversal in US rates could prove to be the catalyst for a USDJPY reversal lower.
The S&P 500 is set to resume higher, according to BofAML's Macneil Curry pointing to the week of December Triple Witching as historically one strongest of the year for the S&P500. With fundamentals a thing-of-the-past, paying attention to the technicals in a world of one driver of stocks (Fed balance sheet), for short-term trading signals may have some value. Of course, with an 'event' as potentially huge as the FOMC meeting this week, adding risk on an already good year (when the world already believes a taper is "priced in") may be more greatest fool than momo monkey.
Since fundamentals have been irrelvant for years, the only possible (short-term) guide in a market in which the only thing that does matter is the Fed's balance sheet, are trends (as Hugh Hendry put it so appropriately) here are some technical trade ideas from Bank of America, on the EURUSD, Treasurys, the S&P500 and WTI.
Treasuries are resuming their bear trend, with 10yr yields pushing above 2.839%, the Nov-21 high and BofAML's MacNeil Curry warns "Treasuries are in trouble." They continue to target a break of 3.00% in the sessions ahead. This is the September/3m range highs. However, they are most focused on 5yr yields and TYH4 (10Y March futures). Remember, Curry cautions, with the MOVE Index turning higher, Treasuries are moving into a more volatile environment. Price action in the next week or so could be explosive. Of coursem while the trend (and consensus) is your friend in this view, given the Fed's dominant position, there is always the chance of a short squeeze.
The broad-based measure of Treasury bond volatility - MOVE - has broken higher, and, as BofAML's MacNeil Curry notes, confirms a base and change in trend (to higher or more volatility). With the month of December traditionally a strong month for the MOVE Index and Treasury volatility in general, Curry warns there are two ways the volatility can move higher - either higher rates or lower equities.
An overview of the near-term US dollar outlook. Not thinking it is crashing and burning next week simply because it is not backed by gold or because the Fed is engaged in QE.
The US dollar looks vulnerable to additional losses next week. While we had correctly anticipated the greenback's losses last week, we had expected it to begin recovering ahead of the weekend. This did not materialize and, leaving aside the yen, the dollar finished the week near its lows. Generally speaking, the technical outlook for the greenback has soured and, in fact, warn of some risk accelerated losses in the period ahead.
As suggested here last week, the dollar moved higher over the past five sessions. Although it finished the week on a firm note, I suspect we may have a pullback before seeing higher levels. Here is why.
Just when the dollar's last rites were being considered, it has bounced back and looks poised to move higher in the days ahead.
BofAML's NacNeill Curry remains bullish gold. He notes the impulsive gains from the 1251 low of Oct-15 and break of the 2-month downtrend (confirmed on the break of 1330) imply the medium-term trend has turned bullish. We look for an ultimate break of the 1433 highs of Aug-28, with potential for a push to 1500/1533 long-term resistance. Curry suggests traders buy this dip at around 1310 - warning that this view is nagated with a break below 1251. For those awaiting, a break of 1375 (Sep-19 high and right shoulder off a multi-month Head and Shoulders Top) is additional confirmation of the trend turn.