A Pair of Currency Leading Indicators

February 27th, 2013

by Chris Kimble

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From a portfolio construction standpoint, when the yield on the 10-year note and Australian Dollar decline in price, history has suggested to underweight allocations towards risk assets. Check out the price situation for both of these right now at (1) in the chart below.

Why is this support point so key for the Australian Dollar and risk assets? Key lows have taken place along a support line that the AU$ is testing right now at (1) below.

Weakness/breakdowns from bearish rising wedges in the AU$ in 2008 and 2011 was followed by declines in the S&P 500 that most would like to have side stepped.

Keep a close eye on the AU$ at (1) above, because history suggests that what it does at this important support line could influence risk asset prices in a big way!

The AU$ isn't the only currency at a key price point right now that could impact risk asset pricing … see below.

The above chart reflects that the Yen is on "Dual Fibonacci" support with very few bulls, and the Nikkei is up against resistance.

What the Yen and the AU$ do at these key support lines will have several "ripple effects" on portfolio construction in the near future!



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