Share prices each have their own little narrative, as we are constantly reminded, with news, personnel, trends and debt determining the outlook for the firm. The trouble is, especially with companies that have a large market capitalisation, the performance of the index they are included in accounts for roughly 80 per cent of price changes in the individual share. Then you find that in a global world indices tend to mirror each other, rising or falling in tandem.
Because this effect is so marked, and has continued for so long, the concept of macro-economic analysis and hedge funds based on this idea have come to dominate institutional accounts. Then things were simplified even further, with trades based on whether investors were happy to pile into so-called risky trades or whether, if things had taken a turn for the worse, a preference for risk aversion developed. ‘Risk on’ or ‘risk off’, for short.
Sometimes though markets do not march to a single drumbeat, the pied piper doesn’t have many followers, and each instrument sings from a different hymn sheet. This, I believe, is the case now in the foreign exchange – and is often the case among minor currencies. Therefore, today we shall avoid these and concentrate on what’s happening with the biggest trading partners of the United States of America.
The euro (EUR), after strengthening throughout 2017, peaked early this year and has now retraced a Fibonacci 38 per cent of the previous rally. The move is clearly corrective – for now anyway – and price action over the last three weeks is a classic morning star base. We expect a rally back up to the $1.2500 area which might be a hard nut to crack because it, in turn, is the 38 per cent retracement resistance taken from 2008’s all-time high at $1.6000.
The Chinese yuan (CNY) also strengthened in 2017, from 6.96 per US dollar to 6.25. It formed a double bottom chart pattern here in Q1 2018, inching up so that one needed 6.43 to buy a greenback. This is less than a 3 per cent devaluation, something that can be largely ignored for international trade purposes. Therefore, added to the current chart pattern, we see yuan weakness continuing in the second half of this year, taking the exchange rate up towards 6.70.
The chart of the Canadian dollar (CAD), quoted the European way as Canadian dollars needed to buy one American one, is a real mess. It gained a cool 28 CAD cents in Q2 and Q3 2017, and gave back the bulk of that subsequently. Being a key trading partner in the rapidly crumbling North Atlantic Free Trade Agreement, this is not surprising. The chart itself gives no clue as to which way the next trend might be; this is exacerbated by the fact we’re trading close to the secular mean regression at C$1.2700. Anyone’s guess.
Brazil (BRL), which faces a truly unpredictable general election in October, has seen its currency weaken a lot this year, taking it to levels unseen in over two years. The psychological 4 reals to the US dollar capped this month, as it did in 2015/2016, and more importantly in 2002 when the left-leaning PT (Workers’ Party) was elected for the first time ever. Will it cap again and be third time lucky? Somehow, I doubt it; next target BRL 5 per dollar.
