Currencies are an important part of analysis as the Euro and market are correlated fairly high, the $USD and the market have an inverse correlation (stronger dollar =weaker market) and the $AUD is predictive in telling us what large funds are doing with the currency carry trade which they finance a lot of their stock market and other asset class purchases with.
Currency markets are a bit harder to analyze as Central Bank policy can change the outlook in a snap as well as a number of other fundamental events.
We'll take a look at what we have thus far, however I think some of the biggest news of the day (whether true or not) is the market watch article that Bernie is about to turn up the heat on asset purchases. If this does happen, it will be very hard to argue that the F_E_D is reacting to and focussing on the jobs market since the program isn't even off the ground. However the reaction in the stock market since the announcement might be more appropriate, if QE3 with its open ended nature sent the market lower and the F_O-M_C decides to add more assets, particularly treasuries, then it looks like they are very obviously targeting the stock market or things are REALLY bad at the banks and I think we'd have more confirmation or rumors if this was the case.
Finally it may just be a rumor, but it certainly seemed to move the market in to the close.
The Euro...
Friday the Euro was in a leading positive divergence, this was part of the reason I decided to add leveraged longs Friday in to an otherwise, "Blood in the streets" day. I'm sure you've heard the saying and that it is the time to buy, but only with proper confirmation (without it you're just trying to catch a falling knife and get lucky) which we saw or at least begin in the last 2 hours or so.
3 min Euro leading positive, there was some backing off in 3C today, but near the afternoon we saw 3C move up.
The 5 min chart is in leading positive position. If we stick with our latest trend expectations, after a range and accumulation a short burst higher to shakeout longs was expected followed by a larger move down to new lows, we wanted or still want to get short on the move up as others are buying and covering shorts. We will continue to listen to the message of the market on this new F_E_D data rumor and of course the policy announcement which fits just about perfectly with what I would anticipate to be the approximate time the market would be ready to make this shakeout move higher.
Euro 10 min has a slight leading positive and saw some improvement in the afternoon today, this of course could be F_E_D rumor related as more asset purchases would mean a weaker dollar/stronger Euro.
The 30 min Euro is where things get ugly and this is about in line with the market averages and expectations for a move higher followed by new lows, so far this fits together pretty well.
$USD intraday
30 min $USD with a positive divergence confirms the Euro 30 min negative divergence as they move opposite each other and a stronger dollar would send stocks lower. So far this still all fits the trend expectations we have been working from.
USD intraday 15 min shows a positive divergence from mid last week, this is the same time the market was in a negative divergence, this is near perfect confirmation, the 15 min chart now though is just barely a tad better than confirmation, I expect it hasn't had enough time to move just as the market averages are not yet at 15 min charts.
The 5 min was positive as the market was turning negative-this fits with the correlation, but near term on the 5 min there is a leading negative divergence which correlates with the market averages' 5 min positives today.
USD daily
Here we see the USD top out just after the market lows at June 4th, rising market and falling dollar make sense, that's the correlation bit recently we have a positive divergence which makes sense with the market fall last week/Friday and a slightly leading positive divergence. This is a longer trend and further out, if it kept developing in this manner it would make sense with market expectations of new lows AFTER we get a shakeout bounce higher.
4 day USD is negative in to the 2002 market lows and keeps moving lower in to the mid 2007 market highs, however since 2009 we have now a leading positive divergence in the dollar, very long term this would make sense with the market dropping as the F_E_D ultimately has to unwind all the stimulus they have created, it's the exit strategy that is the most difficult for central banks and usually pops bubbles in the market, even housing. This is still very far out, but it does suggest the market has been a house of cards since 2009 based of F_E_D liquidity and not real economic or fundamental business strength. If this plays out as it would seemingly have to ultimately, the historic F_E_D intervention would have a historic unwind which would send the market down in a historic way. As I said, this is still pretty far out.
The Australian Dollar (other than the carry trade, this is also sensitive to China).
Near term 2 min leading positive divergence makes sense with the trend expectation of a sharp shakeout move higher as it started developing late last week (remember the $AUD tends to lead the market).
$AUD 5 min in a relative positive divergence, this makes some sense as the market averages are trying to improve in the same timeframe. The negative divergence of the 18th fits perfectly with the market action of the 19th.
10 min we see the same negative on the 18th, the market followed on the 19th and we see the same attempt to go positive in to 10 and 15 min timeframes as the market averages are trying or actually doing, so far this makes sense.
On the 4 hour chart the $AUD is leading negative, this fits with the same charts for the market averages and the same trend expectation of a move to new lows AFTER we get a sharp move to the upside or what I have been calling a shakeout move. This also may have some implications for the future of China and not bullish either.
We'll continue to monitor any and all signals wherever we find them, but broadly speaking, things seem to make sense with the other signals we are getting in the market averages, specific and important stocks, leading indicators, etc. The real wild card is F_E_D policy.
I was very careful last F_O-M_C when QE3 was announced not to follow the knee jerk reaction and cover all shorts and go full long, I demanded evidence first and the evidence we gathered pointed to the direction the market took. Will more asset purchases by the F_E_D change things over the long haul or just another 2 day rally followed by MAJOR BREAKS IN THE MARKET AVERAGES?
Again, we will follow the evidence.
