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
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
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.
as the dollar goes, we see rising stock prices and rising yields
together as bullish for the dollar. But the rising yields are bearish
for stock prices, at the moment, and the dollar and stock market
are probably better correlated these days than the dollar and yields.
The dwindling US budget surplus is neutral in terms of the currency,
at the moment, because all of the global governments have the same
problem. However, the widening current account deficit is unsustainable,
and probably the US' biggest problem, a problem that its unfriendly
trade and foreign policies can quickly fix, to the detriment of
On the other hand, many industries,
both here and abroad, rely on the strong dollar to stay strong.
Even the central banks of the G7 are only as strong as their foreign
currency reserves. So everyone has a stake in the US dollar to some
extent, which is the sole remaining bullish factor propping up the
over owned and over printed currency.
To the extent that a falling US dollar
allows foreign central banks the luxury to keep their own monetary
policy loose, the risk of a correction in the value of the dollar
is overdue anyway. But the risk is to allow the dollar to devalue
such that it brings into question the validity of other "vehicle"
currencies. There is one hedge against that risk:
Editor of The Goldenbar Report