Currencies, Crosses and Implications - An Ongoing Discussion

UPDATE MAR. 3, 2012:

A few days ago commenter Rob submitted a chart showing a breakout in the USD vs. the Yen which only shows up in a log scale chart.  The chart below shows the huge breakout in the dollar that Rob was alluding to:

Rob's Chart - Weekly USD/Yen.  It answers the question "How many Yen will one dollar purchase?"

A few days later, GregInBaltimore correctly pointed out that my Weekly Yen chart was not showing such a profound breakdown as was Rob's chart because I was using a linear scale.  And of course, Greg is right... I should have been using log scales for
charts that display price swings as large as what we're examining here.  That's a bad habit of mine... I tend to forget to switch the view to log scale due to the fact that I'm using linear scales (for trading and analysis purposes) 98% of the time.  So I stand corrected and am happy to re-submit the Weekly Yen chart (below) covering the same time frame as Rob's chart.  Please keep in mind that this chart is of course inverse to Rob's.  I will also leave the weekly linear version where it is so that we can examine the difference between the two in the future (if we want to):

The Baltimore Greg Special - Weekly Yen (log scale).  Click here for a live and updating chart which also displays a few indicators.

And as you can now see, this chart also shows a pretty darned important breakdown in the Yen relative to the American dollar.  We're now looking at it in a way where the moves are percentage based and as Greg pointed out, I should have been using a log scale all along.  

So what are the implications of this breakout?  Here's what I think we're going to see in the future:  If we are truly about to embark on a global sized deflationary spiral, the US dollar would almost assuredly be the strongest currency in the world for quite some time to come.  But I also believe that the Yen and gold will hold up quite well.  In terms of Rob's chart, imagine what the Japanese would be experiencing... 'inflation' in terms of all things priced in US dollars.  And of course that would include gold.  What a change of pace that would be for Japan, a country that has faced nothing but deflation for the past 20 years as their currency continued to strengthen relentlessly.  Consider this... today the Nikkei is at 9777.  In 1990 it was at 40.000.   How's that for a bout of deflation?  Deflation that most Americans seem to think is impossible as long as Bernanke is printing!  Japan has been printing for 20 years and exactly how much did that help in driving the Yen lower once their deflationary spiral was ignited?  Zilch!

In any event,  the phenomenon of other currencies experiencing huge devaluation relative to the USD would be even more profound for those whose currency is crashing even harder than the Yen is.  Europe for example!  In their eyes, the US dollar would look like a pretty darned attractive place to invest their money if their own currency is crashing relative to the dollar.  However, their currency might not be crashing relative to commodities.  

We have to keep in mind that when we're talking about the relationship between currencies, we're not considering what they are doing relative to "real stuff", like food.  We're only talking about what they're doing relative to each other within the global basket of currencies.  A basket that in its entirety has been thrown off a cliff.  So we can indeed have deflation in terms of things made of paper, like fiat money, bonds, and real estate.  I know what you're saying:  "What!  You're saying real estate is not a real thing?"  When we consider that the value of real estate is only as high as it is due to the effect of massive, massive past inflation in the form of paper mortgages it becomes quite apparent that for all intents and purposes the price of real estate is indeed paper.  Yet all the while we can still see inflation in terms of the things we need for everyday survival.

So in the deflationary scenario the problem would be that there would be fewer and fewer US dollars to go around.  As an alternative for those people not using US dollars, gold would also look a whole lot better than their own currency.  So the demand for gold is likely to remain quite strong during a deflationary phase.  There is a theory that in a deflationary scenario everybody will be selling everything they can get their hands on in order to purchase badly needed American dollars.  And the argument is that that would include gold.  I don't buy that particular piece of that debate. 

In any case, what Rob revealed with his chart is actually more profound than I'd realized at first.  Thanks to a reminder from GregInBaltimore, I had to revisit that event and alter my chart to show it more accurately (in percentage terms as depicted by a log scale).  It appears that the US dollar is gaining more steam than most of us had realized.

Thanks Rob and Greg... those were two great contributions to this entire topic of currencies. 

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LIST OF ALL CURRENCY RELATED CHARTS ON THIS ENTIRE POST:

Australian Dollar - 60 min. - over 6 months - Live and updating version - print version
Australian Dollar - 60 min. - over 3 months - Live and updating version - print version
Australian Dollar - 60 min. - over 2 months - Live and updating version - print version
Australian Dollar - Daily
Australian Dollar - Weekly
Aussie:Yen - 60 min. - over 3 months - Live and updating version - print version
Aussie:Yen - Daily
Aussie:USD - Daily
Aussie:Canadian - Monthly
Euro - by Pebblewriter - Weekly
Euro - Daily
Euro - Weekly 
Euro - Monthly
USD - Yen - Monthly Linear Scale
USD - Yen - Monthly Log Scale 
Yen - Daily
Yen - Weekly (log scale)
Yen - Weekly (linear scale)
Yen - Monthly
$SPX - some color magic by Zim - 60 min.
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UPDATE FEB. 28, 2012:

When the YEN is viewed as a stand-alone currency it shows very little correlation with the S&P 500.  But when used in conjunction with the Aussie dollar it's a gem, since those two have been used extensively in the currency carry trade carnival.  So just as we watch the Aussie dollar in a stand-alone chart, it's just as important that we keep our eye on the YEN as well.  As I've stated many times before, when analyzing any ratio it doesn't really matter which of the two components is contributing the majority of the action responsible for making the ratio move.  As long as a ratio is moving, and as long as that movement correlates, that's all we really need to know.  But at the same time, obviously it's to our advantage to know what each of the components are doing and, if possible, to understand 'why' they are moving.  In the chart below we see the action in the YEN on a daily scale:

YEN Daily - Click here for a full blown live and updating version which includes some indicators

When we look at this chart of the YEN, it's important to grasp the realization that the YEN has been in a solid uptrend since the end of WW2.  66 years ago one US dollar would buy 400 YEN.  But the upward path certainly hasn't been without some drama as we'll see in the weekly and monthly charts a bit further below.  For now it's very interesting to notice that the upward path of the YEN does indeed seem to have made a rather impressive pullback starting just one month ago.  When we consider how long the BOJ has been trying to drive the YEN lower, and how ineffectual their efforts have been, we certainly have to take note of what suddenly occurred at the beginning of February. 

But first, we have to consider the incredible drama that unfolded at the time encapsulated within the blue oval.  The earthquake and subsequent tsunami caused unthinkable damage to that nation.  The first and most obvious effect was the near-instantaneous spike in the YEN as it became evident that much of that currency would have to repatriate.  Nearly as quickly, the BOJ announce a massive injection of capital in an effort to drive the YEN back down.  Their efforts were soon supported by the G7 which announced a joint effort to sell YEN into the market as well.  But within only days, the total impact of those massive efforts by the BOJ and the G7 had run its course.  Their efforts had no long-lasting impact whatsoever.  These facts are what makes the recent pullback in the YEN seem so much more significant.  This pullback is based on something happening within the world of global finance and would appear to be more fundamentally important than the tsunami.  Perhaps another tidal wave unfolds but we'll have to watch the YEN over the coming weeks before we'll know.

YEN Weekly - Click here for a full blown live and updating version which includes some indicators

When we zoom out and take a look at the weekly chart of the YEN, it becomes much more clear what's going on.  Most likely all we're witnessing is another in a long series of pullbacks in an otherwise secular uptrend.  I think it stands to reason that the longer blue trend line is probably the target.  Bottom line... we'll likely see the YEN hit 122 at some time in March, most likely toward the end of the month.

 UPDATE FEB. 14, 2012:

Well how interesting.  At the end of today's trading we suddenly find ourselves in a relatively rare situation where the Aussie:USD pair has issued a sell signal for equities while the Aussie:YEN pair has not.  In fact the Aussie:YEN, although looking very toppy is simply refusing to roll over and is essentially advising that it's just fine to hang on to long positions.  I have always maintained that the Aussie:YEN is the more sensitive of the two to the currency carry trade business and therefore has the better correlation with the US equities markets.  The recent action by the BOJ to tank the YEN is a prime example of why I personally have never used the Aussie:USD pair.  Those actions by the BOJ have obviously had their effect, as the futures are soaring tonight.  It remains to be seen how they open in the morning of course, but as of this moment the Aussie:USD appears to have unfortunately issued a flat out false sell signal while the Aussie:YEN pair has once again proven to be loyal to the purpose for which we use it.  Having demonstrated this relatively rare conflict between these two fine indicators, it is still safe to say that although the Aussie:USD has issued the false sell signal, when the Aussie:YEN pair issues its signal, that one will be far more likely to set the bombs away.

I also added the weekly chart of the Euro just below.  Whether or not the labels on it and the monthly chart of the Euro are correct is irrelevant since it is good enough to portray my meaning.  Any practitioner of EWT can understand what I'm portraying.  Further, whether my labeling is correct or not has absolutely nothing to do with my opinion of where the currencies are headed.  And of course I retain the right to change my mind in a heartbeat if developments dictate that I do that.  For now, here's where I believe the Euro is headed:

Euro Weekly - Click here for a full blown live and updating version which includes some indicators.  The monthly can be found here.

 UPDATE FEB. 12, 2012:

On Friday the Australian dollar made a move lower that we haven't see in quite some time. In fact if you scroll down two charts, you can click the link to the live and updating daily chart wherein I had made the comment "this parabola will not continue".  Actually, I'll provide that link right here.  I was not expecting that those words would be proven somewhat prophetic the very next day.  So it's definitely time to drill down into smaller charts of the XAD and see what kind of analysis and signals we can pick up from there.  The next image we'll look at is the 60 min. chart of the Aussie dollar itself (we'll do the same with the crosses very soon).  First, I'm going to show it over the course of 6 months just so that we can identify and appreciate the amazing trend lines that are in play.  I'll also provide a link to the live an updating version which will not show any indicators.  We'll save them for the following link, which will zoom in on the chart and show a shorter time frame.  And finally, a third link to a shorter time frame yet.  Here we go... the 60 minute chart of the Aussie dollar over 6 months:

Australian dollar - 60 min. over 4 months.  Click here for a live and updating version.  For readers who are not subscribed to StockCharts, click here for the "print version" so that you can see the annotations.  I believe the print version is updateable, but you have to click the button.

 Click here for the live 3 month version for a closer look (with indicators).  Click here for the print version.
 Click here for the live 2 month version for an even  closer look.  Click here for the print version if you can't see the annotations.

Now that we've established what has been happening with the Australian dollar in all the important time frames, and in view of the fact that what we're really looking at here is a measurement for the appetite for risk (and a very accurate one at that), we're pretty well set up to monitor it going forward and see what signals it issues.  As of this moment, it appears the Aussie dollar has intentions of heading lower.  What I'm still quite suspicious about is that it may not be the big one.   The weekly chart is still in a very strong uptrend although the histogram on that chart suggests some weakness may be developing on that scale as well.

UPDATE FEB. 10, 2012:

Adding the weekly chart of the Australian dollar into the mix, we have to admit that at this point in time there is nothing to be overly bearish about.  True, there is an outstanding negative divergence between price of the AUD and it's MACD.  But as we all know, since the AUD is in an uptrend until proven otherwise, bull market rules apply.  In that case, we have to ignore the overbought conditions and await some confirmation.  For impatient bears, confirmation is unfortunately going to take a few weeks longer.  Naturally, when that day occurs it will be weeks late but normally not as late as you fear.  Therefore, I have to consider the situation on the weekly chart of the Australian dollar as being quite bullish at the close of this week.  What that suggests is that the sell signal issued today on the daily chart is more than likely just identifying a pullback and not 'the' ultimate top.  We have no option but to draw that conclusion at this time:

Australian Dollar Weekly - Click here for a full blown live and updating version which includes some indicators

UPDATE FEB. 8, 2012:

It's interesting to debate which currency pair, the Aussie/Yen or the Aussie/USD is actually the better of the two regarding the tightness of its correlation with the S&P 500.  But the bottom line is that no matter which one it is, the Aussie dollar is the key to both equations.  So let's put up a chart of that currency, follow it closely and watch for a sell signal.  Thankfully the Aussie is very dependable in its issuance of those gems.  Of course it won't necessarily mark the top but will certainly identify when we're about to see a pullback at least.  Some traders will choose to consider it as a "stand aside for now" signal and that may very well be the best call:

Australian Dollar Daily - Click here for a full blown live and updating version which includes some indicators

UPDATE FEB. 7, 2012:

"Miss Equities", 2012 courtesy of Todd Ferguson.  Lipstick courtesy of the Federal Reserve

The Aussie:Yen pair has, for a long time now, been a fabulous measure of appetite for risk.  As a result it has also had a spectacular tandem relationship with the S&P, producing signals that have yet to be anything other than bang on the money.  And right now, that pair is about as ready to issue a sell signal (to sell the S&P) as at any other time in the past.  This thing is ripe.  The next turn lower in the ratio should do it.  So bottom line right now... watch for the Aussie to start dropping.

I suppose this could be one of those rare occasions when the negative divergences fail to produce the expected result in the S&P 500.  But I can't even conceive of any logical reason to expect that an indicator that has been this reliable as a measure of "risk off" for so long, should suddenly fail to tell the truth.  It's pretty clear by now that everybody and his dog is completely spooked by the action in equities and have almost come to the conclusion that the FED has literally declared that "down" had been outlawed.  I don't care... when this pair shows us that money is suddenly fleeing the Aussie Dollar and is flying into the Yen, there's a reason for it.  We will know damned well that fear has re-entered the mindset of the world's largest investors.  Equities will fall under that scenario.  All we need now is for the ratio to roll over.  It doesn't necessarily have to happen, but indications are that it is probably imminent.  And when it does, neither does it necessarily imply a crash scenario for equities... although what usually follows is a relatively hefty pullback at the very least.  And why not, since it indicates clearly that high risk assets are falling out of favour.  Here's the 'clean' daily chart just to set the tone.  Click the link beneath the chart to see the full picture, complete with the indicators that issue the signals:

Aussie:Yen Daily - Click here for a full blown live and updating version which includes some indicators

The chart below shows the identical set up in the Aussied:USD currency pair.  Left clicking on either chart will bring
up the Lightbox feature making it easy to toggle between these two currency pairs for a quick comparison.  As you can see, there is very little difference between the two insofar as that they behave almost identically.

Aussie:$USD Daily - Click here for a full blown live and updating version which includes some indicators

In the past, more accurate signals actually emerged from the Aussie:Yen pair.  One would think that it might make more sense that the Aussie:$USD pair should be the one which issues the more accurate signals.  But it also makes sense that the signals issued by the Yen pair could be just as (if not more) accurate since the Aussie:Yen is actually more sensitive to the risk involved in the currency carry trade.  In either case, it's pretty clear that the Australian dollar has certainly been the recipient of some pretty hefty inflows during times when investors have felt relatively safe with higher yielding, slightly riskier, currencies.

Ironically, the Canadian economy, which is considerably larger than the Australian, is deemed as being too tightly correlated with the American economy to permit the use of the Canadian dollar in the currency carry trade game.  In other words, the Canadian dollar isn't seen as being "risky enough" to generate the profits that can be garnered by trading the Aussie dollar.  In fact, a week ago Bloomberg published an article entitled "Loonie Reaches Parity as Aussie Overvalued on China Growth" in which they claim that the Loonie is set for another surge while the Aussie should start heading south due to a perceived acceleration within the U.S. economy while China’s output cools.  It remains to be seen whether that surge in the American economy is truly as robust as we're being led to believe.  There's just no way the recent job numbers were anywhere close to reality.

Irony of all ironies, any time in the past when we have seen the Australian dollar peak against Loonie,  we have found ourselves pretty much smack dab in the middle of a global economic expansion.  Or at least an expansion within the US economy (and therefore in the Canadian as well).  In the monthly chart below, which shows the price history of the Australian dollar priced in terms of the Canadian, it would seem that perhaps that metric may be about to change.  Since the world is no longer on a wild spree of monetary expansion via the magic of fractional reserve banking, very little inflation (money creation) is actually occurring.  The entire planet is debt saturated.  If it weren't, we wouldn't be seeing half the countries in the Eurozone teetering on the edge of bankruptcy.

Aussie vs. Canadian Monthly - Click here for a full sized version

The chart below was submitted by Greenface, with accreditation to Tony Candaro.  Regardless of Mr. Caldaro's labeling, the chart for the German mark helps to put the monthly Euro chart into perspective since the Euro has only been in existence since 1991.  In the image below we can see exactly where the Euro would tie in with the mark, for the sake of continuity:

Original image courtesy of Tony Caldaro.  Blue annotation by yours truly.  Thanks to Mr. Caldaro.

ORIGINAL POST:

I've been meaning to start a post that's dedicated to the study of currencies but haven't gotten around to it until now.  I think I'll keep this post ongoing and growing with regular updates and with the addition of many more charts as we move forward.  If the post grows too big I'll start another one and link them together as a kind of ongoing discussion.  I've used this method at Seeking Alpha (on a different topic) and it has worked very, very well.  In fact it has evolved into a series of posts that is now into its 29th month and still running.

Euro Monthly - Click here for a full blown version that includes some indicators.  The weekly can be found here.

As most of my friends know, I'm not careful enough about applying the proper degrees for labeling.  For my own purposes that doesn't matter though because I know what I'm thinking.  Not to mention that they're just bad enough that I don't rely upon them, which is also why I don't bother to post my EW counts very often. But they're a great way to inspire discussion which is where I really get the greatest benefit.  So if anybody out there wants to correct me with the degrees, etc., please do and I'll change them.  But for now we start with the monthly chart of the Euro, which shows the entire life of that currency.  If there's enough interest we'll add a lot more charts, on a lot more time scales, on several individual currencies and several different currency pairs... keying on the most meaningful ones.  And man, are there some dandies.

If anybody else out there would like to submit their own charts with their own counts, feel free.  We can even add some of them to the post itself as we move forward.  This is another thread that I could certainly see running for 29 months, if not longer.  This is all I've got time for at the moment... but it's a start.


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