The Aussie Dollar is testing its major support level at $0.95/$0.96. Declining 13-week Twiggs Momentum warns of a long-term down-trend. Breach of $0.95 would offer a target of $0.80.
* Target calculation: 0.95 – ( 1.10 – 0.95 ) = 0.80
Forex: Aussie, Yen and Euro find support
The Aussie Dollar broke support at $0.96 against the greenback before retracing, the long tail indicating buying pressure. Expect a weak bear rally to test resistance at parity before another decline breaches primary support, offering a target of $0.90*.
* Target calculation: 0.96 – ( 1.02 – 0.96 ) = 0.90
The euro has so far respected primary support at $1.27. Breakout above resistance at $1.30 would suggest a primary up-trend; confirmed if the euro follows through above $1.32. Breach of support is unlikely, but would offer a target of $1.20/$1.22*.
* Target calculation: 1.27 – ( 1.32 – 1.27 ) = 1.22
The greenback retreated sharply against the yen as Japanese investors repatriate offshore bond and stock investments — see Mrs Watanabe Brings Home the Bacon. But the longer term trend is unchanged. Respect of support at ¥100 would signal a fresh primary advance. Breach of the long-term declining trendline indicates the 30-year secular bear trend is over. Long-term target for the advance is the 2007 high at ¥125*.
* Target calculation: 100 – ( 100 – 75 ) = 125
Gold and commodities fall while Dollar and bond yields rise
Gold broke the rising trendline and support at $1440/$1450, indicating another test of primary support at $1320. Target of $1200* for the decline would be confirmed by a breach of primary support.
* Target calculation: 1350 – ( 1500 – 1350 ) = 1200
Treasury Yields
Ten-year treasury yields broke resistance at 1.80% and are headed for a test of 2.00/2.05%. Breach of that level would signal a primary up-trend, but the thirty-year secular bear trend (in yields) remains downward and would only be reversed by a rise above 4.00%. Respect of resistance at 2.05% remains likely and would indicate another down-swing to test primary support at 1.60%. A weak inflation outlook, as indicated by falling gold prices, would decrease demand for stocks (as an inflation hedge) and increase demand for bonds.
Dollar Index
The Dollar is strengthening, with the Dollar Index testing resistance at 84. Breakout would signal a test of long-term resistance at 89/90*.
* Target calculation: 84 + ( 84 – 79 ) = 89
Crude Oil
Brent Crude respected resistance at $106/barrel, indicating a down-swing to $92*. Nymex WTI respected resistance at $98 and is likely to re-test resistance at $85/barrel. A classic pair trade, the spread between the two is likely to narrow as the European economy under-performs.
Commodities
Commodity prices continue to fall, with the Dow Jones/UBS Commodity Index headed for primary support at 125/126. The major driver of commodity prices is China and reversal of the current down-trend, on both indices, appears some way off despite a US recovery.
Forex: Aussie breaks support while Yen soars
The Aussie Dollar broke primary support at $1.015 and is testing parity against the greenback. Parity is not expected to hold and we are likely to see a test of the next major support level at $0.95/$0.96. Narrow fluctuation of 63-day Twiggs Momentum around zero continues to suggest a ranging market.
The euro is retreating, headed for another test of $1.2750. Respect would signal another attempt at $1.37, while failure would indicate a primary down-trend — testing long-term support at $1.20. The failed advance to $1.50 would be bearish; and breach of $1.20 would offer a target of $1.05*.
* Target calculation: 1.20 – ( 1.35 – 1.20 ) = 1.05
Rapid expansion of the monetary base by the Bank of Japan is fueling inflation fears and weakening the yen. Lars Christensen points out that, with competitive devaluation from all quarters, exports are not likely to play a major part in a Japanese recovery. What is more likely is a consumption and investment boom as households invest in real assets as a hedge against inflation.
The greenback broke resistance at ¥100 against the Japanese Yen — a one-third appreciation from the lows of 2011/2012. Expect retracement to test the new support level, but breach of the long-term declining trendline indicates the 30-year secular bear trend is over. Long-term target for the advance is the 2007 high at ¥125*.
* Target calculation: 100 – ( 100 – 75 ) = 125
Aussie Dollar shrugs off rate cut
The Aussie Dollar rallied off primary support at $1.015 despite a 25 basis points rate cut by the RBA, to a historic low of 2.75 per cent. Narrow fluctuation of 63-day Twiggs Momentum around zero suggests a ranging market. Follow-through above $1.03 against the greenback would suggest another test of $1.06.
Fall of the Aussie has long been predicted as commodity prices weakened, but capital inflows from investors and central bank diversification of their traditional dollar and euro holdings have shored up the AUD above parity. Capital flows, however, are fickle and will increase the severity of any eventual fall — so don’t grow complacent.
Weaker Dollar Outlook
Recovery of the Dollar has been overrated. With restrictions on fiscal deficits, it will be difficult to contain deflationary pressures from the Great Credit Contraction which is likely to endure for at least a decade — following the Great Credit Bubble over the last 40 years. Fed quantitative easing is likely to endure for longer than many observers, myself included, initially expected. And inflation will remain low despite QE, which is offset by deflationary pressures from the Great Credit Contraction.
The lower inflation outlook is reflected by falling gold and rising bond prices.
The Great Credit Bubble
There were two distinct credit bubbles in the last 50 years: the first in the 1980s, the second in the early 2000s. The chart comparing growth in Domestic Nonfinancial Credit (both Private and Government) to nominal GDP shows two clear episodes where credit growth outstripped GDP. Both resulted in significant falls in GDP from which the economy struggled to recover. The latter episode fed into the housing market, leading to the global financial crisis.
The Great Credit Contraction
If we look at total Domestic Nonfinancial Credit, the rate of growth remained positive. So why call this a contraction? But the aggregate conceals a hidden danger: private household credit contracted, threatening a deflationary spiral similar to the 1930s — when GDP fell almost 50 percent.
Which is why the Federal Government frantically borrowed money for stimulus spending — to offset the effect of private credit contraction.
Government deficits have not solved the problem — they are merely kicking the can down the road. Household credit growth continues to lag GDP.
Outlook for the Dollar
The Dollar has not benefited from the lower inflation outlook as interest rates are also likely to remain low. Primary advance of the Dollar Index ($DXY) seems to be losing steam, with a lower peak than mid-2012. Expect a test of primary support at 79. Penetration of the rising trendline would indicate trend weakness, while failure of support at 79 would signal a reversal. Twiggs Momentum is approaching the apex of a long-term triangle; reversal below zero and the rising trendline would also warn of a reversal.
Forex: Aussie consolidates while Sterling surprises
The euro is consolidating between $1.30 and $1.32. Upward breakout is more likely and would test the high of $1.37. Reversal below $1.30 would warn of another decline, to around $1.24*. In the long-term, breakout above $1.37 would signal a primary advance to $1.50. A 13-week Twiggs Momentum trough at the zero line would reinforce this.
* Target calculation: 1.28 – ( 1.32 – 1.28 ) = 1.24
Pound sterling surprised with a reversal above resistance at $1.53. Follow-through above $1.54 would suggest an advance to around $1.58, while retreat below $1.52 would signal a down-swing to $1.43*. Declining 13-week Twiggs Momentum, below its 2011 lows, strengthens the bear signal.
* Target calculation: 1.53 – ( 1.63 – 1.53 ) = 1.43
The Aussie Dollar rallied off primary support at $1.015. Narrow fluctuation of 63-day Twiggs Momentum around zero suggests a ranging market. Respect of support suggests another test of $1.06.
Canada’s Loonie found support above $0.97 against the greenback, suggesting another test of $0.99. Breach of the rising trendline, however, would indicate another down-swing.
The greenback is testing resistance at ¥100 against the Japanese Yen. The 30-year down-trend of the dollar is over. Breakout above ¥100 is likely, and would suggest an advance to the 2007 high at ¥125*.
* Target calculation: 100 – ( 100 – 75 ) = 125
The Fed, ECB and BOJ are all printing money and debasing their currencies. The US dollar, although taking on water, is viewed as the safest — because it is sinking slower than the others. There are signs the Fed is likely to slow quantitative easing in the next 6 to 12 months.
Gold rallies while treasury yields fall
Gold is testing short-term resistance at $1440. Bear market rallies are notoriously unreliable and reversal below $1400 would warn of another down-swing. Breach of $1330 would confirm another decline, with the next major support level at the 2008 high of $1000.
* Target calculation: 1550 – ( 1800 – 1550 ) = 1300
I am still bullish on gold in the long-term. We face a decade of easy monetary policy from central banks, with competing devaluations as nations struggle to recover at the expense of each other. This WSJ interview with PIMCO CEO Mohamed El-Erian offers a realistic long-term outlook.
Dollar Index
There has been no major strengthening of the Dollar, which one would expect if gold’s fall was caused by revision of the market’s inflation outlook. The primary trend is up, but so far resistance at 84.00 has held. Breakout would signal an advance to 89.00/90.00.
Treasury Yields
Ten-year treasury yields continue to test support at 1.70%. Follow-through below 1.65% would test the July 2012 low at 1.40%. Prior to 2012, the 1945 low of 1.70% at the end of WWII was the lowest level in the 200 year history of the US Treasury. Money flowing back into treasuries is a bearish sign for stocks.
Crude Oil
Brent Crude is falling sharply, while Nymex WTI rallied back above $90/barrel. The gap between the two is narrowing as the European economy slows. Falling crude prices are a healthy long-term sign for the economy, but indicate falling demand and medium-term weakness. Nymex reversal below $90 would confirm a primary down-trend.
Forex: Euro finds support while Sterling, Aussie and Loonie fall
The euro respected primary support at $1.26 on the monthly chart. Follow-through above $1.32 would indicate another test of $1.37, while breakout above $1.37 would signal a primary advance to $1.50. A trough above zero on 13-week Twiggs Momentum would reinforce this. Reversal below $1.26, however, would signal a down-swing to $1.20.
* Target calculation: 1.35 + ( 1.35 – 1.20 ) = 1.50
Pound sterling respected resistance at $1.53 against the dollar, confirming a down-swing to $1.43*. Declining 13-week Twiggs Momentum, below its 2011 lows, strengthens the signal.
* Target calculation: 1.53 – ( 1.63 – 1.53 ) = 1.43
The Aussie Dollar fell sharply, headed or a test of primary support at $1.015. Narrow fluctuation of 63-day Twiggs Momentum around zero suggests a ranging market. Respect of support would suggest another rally to test $1.06.
Canada’s Loonie respected resistance at $0.99 against the greenback. The primary trend is down and breakout below $0.97 would indicate another decline, while breach of $0.96 would strengthen the signal. Respect of $0.96, however, would suggest an advance back to the 2012 high of $1.03; strengthened if resistance at $0.99 is broken.
The greenback is testing resistance at ¥100 against the Japanese Yen. The 30-year down-trend of the dollar is over. Breakout above ¥100 is likely, after brief consolidation/retracement, and would suggest an advance to the 2007 high at ¥125*.
* Target calculation: 100 – ( 100 – 75 ) = 125
The Fed, ECB and BOJ are all printing money and debasing their currencies. It is a case of which boat is sinking the fastest, and the US dollar, although taking on water, being viewed as relatively safe. The fall of gold reveals the market view that the Fed is likely to tail off quantitative easing in the next 6 to 12 months.
Gold: Will it bounce?
“Never try to catch a falling safe” warn the pundits …. “Wait for it to bounce.”
So far we have not seen much bounce. After finding short-term support at $1320 on the 2-hourly chart, gold rallied to $1400 before retreating to test $1360. The long tail at $1360 indicates buying pressure and we should see another test of $1400. Breakout would indicate a rally to $1440*, but bear market rallies are notoriously unreliable and prudent traders are likely to avoid. Reversal below $1360 is likely and would warn of another down-swing.
* Target calculation: 1400 + ( 1400 – 1360 ) = 1440
On the monthly chart we can see that $1300* is the obvious support level, but the severity of the fall indicates this is a bear market and will take time to recover. Breach of $1300 would signal another decline, with the next major support level at the 2008 high of $1000.
* Target calculation: 1550 – ( 1800 – 1550 ) = 1300
I am still bullish on gold in the long-term. We face a decade of easy monetary policy from central banks, with competing devaluations as each nation struggles to recover at the expense of the other. I would recommend this WSJ interview with PIMCO CEO Mohamed El-Erian for its realistic long-term outlook.
Dollar Index
There has been no major strengthening of the Dollar, which one would expect if gold fell because of downward revision of the market’s inflation outlook. Breakout above resistance at 84.00 would signal an advance to 89.00/90.00, but there is still much work to be done.
Crude Oil
Crude oil prices fell sharply, signaling a primary down-trend. Interestingly, Brent Crude broke its primary support level at $106/barrel on April 8th, 4 days ahead of gold. Nymex WTI followed the next week and will soon be testing support at $84/barrel. Falling crude prices are a healthy long-term sign for the economy, but indicate medium-term weakness with weak demand anticipated in the year ahead.
Commodities
Dow Jones-UBS Commodity Index fell sharply in response to gold and oil. Divergence from the S&P 500 looks even more extreme and stock prices are likely to fall.
Slowing growth in China — the major driver of global commodity prices in recent years — is part of the problem, but aggressive action by Japan is also destabilizing global markets.
