$USD Update & Market Repercussions

This time is giving me an opportunity to see which stocks on my list are looking like they'll respond and come to us, which look the best and allowing me to set price alerts so if they meet the ideal target/entry area, I'll know immediately and can confirm the expected signals and make a decision on whether it's a strong, high probability, low risk trade.

In considering the $USD we are not only considering the recent leading relationship it has had with the market,  thus as of this week the anticipated bounce in $?USDX should act as a leading indication for the market bounce we are seeing right now with its base under construction.

We are also looking at a much bigger story, that of the F_E_D and interest rate hikes and that of the Carry Trade unwind, both scenarios are interlocked and effect each other. The F_E_D knows that interest rate hikes would have the effect of strengthening the $USD which is already too strong vs. those countries that are in outright Q/E such as Europe, Japan or any other countries that are trading lower than the $?USD which causes problems for exports and US multi-nationals. So as of the last F_O_M_C (before yesterday's) they made it very clear that $USD strength was one of the things they were concerned about in hiking rates.

However, it is my opinion and I think we can make a good case for FACT that the F_E_D not only inflates asset bubbles such as they did with housing and the stock/bond market since 2009, but they also pop bubbles as they did with the Housing market , Dot.Com tech bubble and I suspect they are willing to pop the current equity bubble to normalize policy from nearly 6 years of highly accommodative policy  (the last interest rate hike was 2006!!!).

I know this carry trade stuff is a bit confusing vs. what most investors know about the $USD's historical legacy arbitrage correlation which is exactly the opposite of the carry correlation. The point being, popping the market bubble unwinds the carry trade and that sends the $USD lower, off-setting any effects (a higher $USD) of policy tightening. So the unwind of the $USD carry sends the $USD lower while F_E_D policy tightening (rate hikes) want to send it higher, in the end it should be a wash theoretically, except when the carry trade unwinds at 300:1 leverage, those on the losing end (those who waited too long to act), take substantial losses quickly causing the $USD to snowball lower so it may be that the $USD actually falls in to F_E_D policy tightening and I think that is what both the $USD and Yen have been reflecting.

If I had more time, I'd update the Yen and Euro charts as well, but suffice it to say for now, the primary trend in the Yen has changed (no longer as carry friendly and looks like evidence the unwind is already in effect) as expected at this point in the market.

Short term however, I'm thinking about the counter trend bounce in the $USD I talked about last night and the correlation (if there's still any left) as a leading indication for near term market direction.

$USD daily 3C chart...

 Amazingly for such a long timeframe, it has worsened this week alone and specifically the last 2-days, note the new leading low in 3C.

Taking a closer look at the same 1-day $USDX chart and the change in trend seen above from UP on the carry trade to lateral or a triangle top and the very recent break down...

 1-day $USD close up shows the same type of triangle seen in the market averages and as we have forecasted as of April 2nd (seen in last night's Daily Wrap or yesterday's $USD Update and USO / Oil Update, the Carry Trade ($USD-Broad market too). )

We now have a clear break below the triangle, a lower high and now a lower low and are sitting right near support at intraday lows (yellow dotted line), which is just a good a place as any for the $USD to make a counter trend bounce/correction.

The April 2nd $USD forecast...

 On the 2nd the $USD was weak, but the forecast was that a move higher was coming which it did (green) which would be followed by an even larger move lower which it has. At the yellow "CTB" (Counter Trend Bounce), this is a NORMAL corrective move that ended and established the leg lower. Right now we are in the perfect place for another CTB at intraday low support as seen on the daily chart above.

 In addition, we have had positive 10, 15 and now 30 min divergences in $USD such as the one above (30 min) with a base/reversal process also under construction like the broad market.

 This 1 day chart of $USD (candlesticks) vs ES (purple), shows the more recent falling off of $USD carry support and leaving ES unsupported.

Today we see the $USD/JPY up significantly on Yen weakness and $USD strength, ES is in purple on this 1 min chart.

I suspect there are a few things going on here, one is support for the Nikkei as it was toasted last night, down -2.69% as it is going to be effected negatively by a USD/JPY carry unwind with an increasing Yen. Remember the negative 1-day $USD and the positive 1-day Yen? What would you expect the 1-day Nikkei 225 futures (NKD) to look like on the same daily chart?

 NKD Nikkei 225 futures, just as I would expect, topping and turning negative.

 The 60 min chart shows the negative divergence this week sending it lower.

 However with a $USD counter trend bounce, the Yen should weaken, the $USD/JPY lift and support a counter trend bounce in the Nikkei futures as well as seen here on an intraday 1 min 3C chart with a strong positive divergence.

This is the ballet, the beautiful part of the market where everything comes together and makes sense. 

This 30 min chart of Nikkei futures with a recent positive divergence.

I suspect the other half of the strength in USD/JPY is specifically from today's Initial Claims, the 2nd lowest print in the history of Initial Claims, this does a lot to make a stronger case for the F_E_D's want to see stronger employment and a stronger case for rate hikes sooner than later so everything is coming to a head, but the $USD was up on this morning's Initial Claims print showing the labor market strengthening (at least that's what the data shows) which is what the F_E_Dm wants for a interest rate hike.

Near term the effect it has had on the $USD and by extension the JPY, would be supportive of a bounce along with near term $USD analysis (counter trend bounce), but the bigger picture (daily $USD charts, Nikkei charts, Yen charts are all falling apart.

Translation, likely bounce...CRASH