Elliott Wave Analysis of the USD/JPY Currency Pair and 30-year T-Bonds by Sid from ElliottWavePredictions.com. Click on the charts twice to enlarge.
The first week of 2013 was very important for the USD/JPY currency pair and U.S. Treasuries.
Last week, the combination of continued weakness in the Yen and renewed US Dollar strength pushed the USD/JPY pair well past the target zone shown in my December 20 post. There is little doubt now that the upward movement from the September 13 2012 low is impulsive, and not part of a bullish leading expanding diagonal, despite the fact that black wave one looked a lot more like a “three” than a “five”. The target for black wave 3 is now at 91.11, where it will reach 1.618 times the length wave 1 black was. If the pair continues to move aggressively above that, the next target is where wave 3 black will equal 2.618 times the length wave 1 was, at 99.73. We are therefore unlikely to see the pair move below 84.176 anytime soon, which is now black 4 invalidation.
As for the 30-yr T-Bond, which has been highly correlated to the Yen for decades, the overlap that occured on Jan 2 makes it much more likely that the July 25 2012 high will hold as the end of the 30-year cycle that started in October 1981, despite the fact that the initial move down from the July 25 high looks very much, once again, like a “three”. (deja-vu)
Ultimately, the resulting implications of these developments are: 1) a stronger U.S. Dollar (immediate flight to safety/need), 2) rising bond yields (fear of eventual U.S. default), 3) weaker US equities (on stress caused by rising mortgage interest rates), and 4) stronger Asian equities (rising from an extreme oversold condition, and further lifted by a weaker underlying currency). The perma-bull U.S. equity pundits, despite the current bullish sentiment extreme, are hoping investors will jump out of bonds now and into equities, goosing them higher. This may be true to a small degree, but bond holders are more likely in my opinion to bail straight into greenback cash due to their inherent tendency toward risk aversion, or, the more adventurous could look to emerging markets by moving into Asian equities.
For example, check what’s been happening in the Shanghai Composite Index since my September 8 2012 post, which anticipated a major trend change. Since the December 4 low, the Shanghai is up 16.8% compared to only a 3.8% gain during the same period in the Dow Industrials. US equities continue to be overbought after almost 4 years of choppy, overlapping, corrective-looking upward movement on low volume. Also, continued flight to the greenback, which gained traction impulsively last week (see the Jan 2 GBP/USD post) would not be supportive of further strength in U.S. equities.