Take, for example, China’s offshore yuan against the US dollar, which hit its weakest ever at 6.9650 last month. Words such as ‘unprecedented’, ‘new lows’, ‘slump’, ‘significant moves’, ‘six-year low’ and ‘rout’ were liberally used in the press (who are, of course, always chasing eye-popping headlines). What they deliberately omitted to mention was the fact that offshore trading has only been allowed for six years, while onshore yuan has been around for a lot longer as cautious moves towards convertibility were introduced in the late 1980s and early 1990s. Not a free float but a crawling peg to a widening basket, which explains the very unusual chart. Price action over the past three years has merely brought it back to 2008’s levels. Therefore, look at the onshore chart for clues as to what the offshore might do next.
Another classic faux-pas/foot in mouth is suggesting that record prices mean that technical analysis is useless. Take the Turkish lira, where in November last year we suggested it would continue to weaken. How? Right-angled triangle consolidation between 2.5500 and 3.0900 was merely another step in the secular trend to a weaker lira versus the US dollar. Its height gave a first measured target at 3.4150, and a second one at 3.6235. Let’s see how it pans out.
Another idea is to plot the mean regression and use standard deviations either side of this as a way to add some leeway to the prevailing trend. We have done this for the Indian rupee against the US dollar over the past two years, adding a conventional trend line from 2013’s low. The underlying idea is that one is measuring the prevailing pace of devaluation, possibly based on interest rate and inflation differentials, estimating the tolerance authorities might be using around the mean.
Sometimes markets trade in a straitjacket for a very long time. When they break the band, often charted as rectangle consolidation, the shock of the new can be dramatic indeed. This was certainly the case for some emerging markets indices, where Mumbai’s Sensex is this week’s example. From 1992 to 2003 it traded between 2,500 and 5,000 – a not inconsiderable series of price swings. More extraordinary was the length of time this held, only to be unleashed this century as capitalism took hold in what had been a socialist, Russia-leaning nation. Note the tentative steps above the top of the range in the first three quarters, to be replaced by a very aggressive rally through to 2008. Technical analysis uses the height of the band as a first measured target (5,000-2,500 added to the break above 5,000 equals 7,500). A second measured target is the width of the rectangle, again added to the breakout, which would have given you a second staggering one at 22,500. Not bad for an uncharted move.
