The message of the markets - October 13th 2019
We promised in an earlier blog on September 29th 2019 https://investment-chart-strategy.tumblr.com/post/188036329493/the-message-of-the-markets-sep-29th-2019 to breakdown the DXY as a sum of its parts to figure out whether the individual components of the index were also reiterating what we felt the Elliott Wave count of the Index was telling us. So we will begin with the Euro.
EURUSD
We are of the belief that we are only just starting a multi-month rally in EURUSD that could take us as high as 1.30. While that seems like an impossible target given Europe’s stagnation for over a decade a more reasonable target might be the Euro’s valuation from a purchasing parity perspective.
The chart suggests that the Euro is about 11.81% undervalued as of August month end. So fair value seems to be around 1.2629 which is fairly close to the minimum 1.30 target. However, the key to remember is that currencies overshoot from being undervalued to overvalued and given the undervaluation currently the chances of an overshoot past 1.2629 are fairly high as historically we have seen this phenomenon.
GBPUSD
Similarly with the Pound we believe there is substantial upside in the pound versus the dollar and our initial minimum target for GBP is in the 1438-1.457 range. Once again this sounds like a formidable target to get to but if we once again use valuation as a gauge and lean back on purchasing parity as seen on the chart below, fair value seems to be at 1.61 using PPI as the measure.
USDCAD
Here to we see USD weakness versus the CAD. At a minimum we expect USDCAD to reach the 1.19-1.21 cluster of support which is around where fair valuation of this currency pair is measured by purchasing parity.
USDSEK
The interesting aspect of USDSEK is that while my conviction isn’t as strong whether we have completed an ABC wave and I will post a more detailed weekly chart below, the overvaluation of USD vs the kroner has never been higher from where I have data, higher than the Plaza accord and the USD bull move at the end of the 1990s. Fair value is at 6.17 versus 9.809 where we close on Friday Oct 11th.
USDJPY
This is one currency pair where I see USD strength and the implications from this view is that we are in a risk on period as so we see USDJPY will strengthen to a minimum of 1.24. We will leave our discussion here and not talk about USDCHF as that seems for all intents and purposes a managed exchange rate.
As always trade well
