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The Dow Industrials fell through the second
of several key supports that still lay ahead, and bulls spent the rest
of Monday clawing their way back up over that level. By Tuesday, they
were able to inspire a 200 point comeback in the Dow. There's lots going
on there, and I'm sure the bulls and bears will hammer out the fine details
in no time. But today we're going to take you through an overview of the
major currency markets, specifically, what the market in each currency
has been up to, both technically and otherwise.
Technically, you may regard each support
level as that place on the chart where many buyers and sellers have met
before. Accordingly, their importance is ranked in terms of volume as
well. Support and resistance points also have implications in trend theory,
depending on their sequence and what happens in between.
As we walk you through each of the major
currencies, try studying the price and volume relationships for any patterns
or rhythm. In particular, observe how volumes change while prices are
making higher highs and higher lows, or lower highs and lower lows. There's
nothing I'd like to specifically point out. Consider it an exercise in
reading the tape, and see if you can deduce anything about the future
by examining how these relationships change through time.
Keep in mind that while we're studying
them we already have thousands of charts like these filed away in our
long term memory. So for instance, I can look at the first chart of the
US dollar above and observe that the peak in the dollar during February
coincided with the beginning of a Dow bull charge, driven by the prospects
for war in the M.E. and trade protection for certain US industries. Thus,
this could help explain why the decline in the dollar on Tuesday turned
out to be a bullish factor for the Dow, at least for some of the cyclicals.
Anyhow, since the February peak in the
dollar, several currencies have been building (chart) arguments for a
reversal against the dollar, Gold making the strongest case of them all.
In the longer view, we already know that 2001 was the first year since
1994 that gold prices out performed the dollar. A glance at the long term
chart of the dollar index (trade weighted) will reveal that momentum has
been tiring since late 2000. Or we could say that the dollar has become
a choppy trader.
Indeed, it has, and we interpret that as
a transition behavior. When will the market stop being choppy? When it
knows which way it wants to go. To help us figure that out, let's consider
what's happening in some of the other currencies.
Europe's fundamentals actually haven't
been too bad, when measured by aggregates and compared with those of the
US, and Canada.
If anything, their perkier prices argue
for higher interest rates and a stronger euro, while their current account
surplus argues also for a strong euro. The "Euro's" fundamentals,
on the other hand, are a different thing altogether. The new currency
hasn't had a lot of time to garner long term confidence. There are political
hurdles too. The currency probably carries a higher risk premium and is
thus a heavy burden on monetary policymakers. Yet, all the more reason
those policymakers need to ensure a strong euro exchange rate. The fundamentals
for the Pound and Swiss Franc are different in that respect, and perhaps
in terms of any assumptions about economic activity between the euro area
and Britain, or Switzerland as well.
Note, in the charts to the right, how the
action of the market influences the moving average (red line). I consider
it important when the activity begins to bend this statistic in one direction
or another.
This way we could say that a move is more
significant when it begins to affect the moving average. Its significance
would vary according to the parameters selected. We're using the 200 day
moving average, which is a very fair measure of intermediate (medium term)
winds. All of the European currencies have generally been trending up
in a 2-month sequence of higher highs and higher lows, which is coincident
with the peak in the Dollar index, naturally. For the Euro, the resistance
level that controls the bigger picture seven month downtrend against the
dollar is near $0.90, which is basically the highest level on these daily
charts. In fact, in all of the European currencies, the highest high on
the whole chart to the left, made in early November, represents the respective
resistance points, which control their downtrends.
I do not regard a price move through the
moving average as significant (beyond a five minute trade), but I do have
a few rules of thumb (proprietary of course).
In the Swiss Franc, for instance, its ability
to stay above the moving average is only significant if it can put in
another higher high, and even more significant if it can break through
0.62, November's high.
Over the past few weeks, the Pound has
been the sharpest performing European currency. I can confirm this with
my own read of the daily tape. It's been trading with some conviction
recently. The Bank of England has been prepping the market for an interest
rate hike, something that only the Bank of Canada has done so far among
the countries whose currencies we're looking at. The Canadian dollar has
one of the worst looking long term charts of the bunch, in my opinion,
and indeed it has been trading weaker than most of its peers, including
the Australian dollar, and despite stronger commodities markets.
I don't believe that a quarter percentage
point increase in the bank rate is going to be enough medicine to cure
the CAD's long run technical and fundamental problems. But what do I know.
The Reserve Bank of Australia was supposed to raise interest rates, but
also has been timid in making a decision. Indeed, all of the main central
banks are faced with the same dilemma on interest rates that the Fed is
today. Only, not all of them have a current account deficit the size of
the US, and none of them issue what could be considered a reserve currency
except for the Fed. The question investors need to ask is how will these
currencies all trade on a global interest rate rise, and will they be
affected by which banks will raise rates next?
The Yen has had the worst six months of
them all. Note how far prices moved from the moving average on the way
down. Indeed, on the one hand, that could be a contrarian indicator, but
on the other hand, prices have yet to exert a bullish influence on the
moving average. Still, on a purely technical basis, the price and volume
behavior of the yen is the most bullish since February's peak in the dollar.
The bullish factor there for the yen is
whether the Nikkei and yen can rise in unison, which depends largely on
a recovery in the beleaguered banking sector. Don't discount that. Bank
shares have been doing well over there, maybe after having already discounted
the worst over the past ten years or so. Besides, the government has all
but said it wants to inflate the stock market, which unlike the Dow, is
near 15 year lows (perhaps an easier task?).
Banking troubles aside, there is no other
country in the world with as much in savings overseas, particularly in
relation to foreign investment in their own country, as Japan. The payments
system favors a strong yen, or at least it has generally for almost twenty
years. In our view, it's the last year that has been the anomaly in the
yen. Paradoxically (not really but yes if you listen to mainstreet today),
the more dire the private banking structure in Japan becomes, the more
pressure there will be for them to liquidate their overseas investments,
called a repatriation of capital, or profits. The strong Aussie and strong
Yen, however, are short term bearish factors for gold, at least until
the fall in the dollar becomes precipitous and provokes fresh investment
demand for gold.
Most central banks are probably rightly
concerned about undermining the value of their largest currency reserve,
by being the first to raise interest rates. Or maybe they feel that the
US dollar is due to fall, and hope to benefit from the resultant reduced
pressure by the market on them to raise interest rates. The point is the
investor must assume not only that monetary policy affects currency relationships,
but also that currency relationships (their activity and outlook for them)
affect monetary policy.
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Most of the charts below are daily
graphs dating
from October 2001 to Monday, April 15, 2002
(source:
Reuters Bridge).
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