It feels like an age since I’ve written about foreign exchange in this column. It’s not because I no longer think it matters – it does, just ask someone who’s currency is currently imploding. It’s not because I’m not looking at FX charts, I am. For years, I’ve maintained a strict daily discipline, skimming through a series of key charts at speed, always in the same format and the same order. Like a captain on a ship or air traffic control, I’m looking to see if everything is in the correct place and what stands out as a glaring aberration or unusual trend.
And the problem has been that since June 2018 the US dollar, and most currencies I look at against it, has been stuck in a tight range. The US dollar index, for example, has kept between 93.00 and 97.00 most of the time since then. Unsurprisingly, observed volatility drifted throughout 2018 so that, by the year-end, it was over one standard deviation below its long-term mean regression. Volume and open interest in the futures contract have been on the slide for two years.
Digging a little deeper, and reverting to our much-loved ranking system, we can see that some currencies got weaker in the second half of the year, such as the Australian dollar, Indian rupee, Russian rouble and especially the Turkish lira. Most currencies, however, kept to fairly tight ranges in the third and fourth quarters, and some have got stronger since New Year’s Eve.
In this last group are most major currencies, sterling a surprise in this group, up 4 per cent, and the Thai baht snapping at its heels, up 3 per cent. Looking at cable’s chart today, an important low was put in place in January and, by historical standards, it is still cheap; expect a rally to $1.3600, possibly with an overshoot to $1.4000 by early summer. Thailand’s baht has been managed slowly stronger, from almost 37 per US dollar in 2016 to 31 today; expect further appreciation to 29.5 this year, at which point the authorities are likely to stem the flow as this is its strongest point over the last decade. (Note that before the 1997/98 Asian crisis it traded at 25 per greenback.)
Currencies going precisely nowhere include the euro and Swiss franc, which will probably remain range-bound for another six months. Going nowhere special now, but labouring under the threat of potential devaluation, are the Chinese yuan, Indian rupee and Russian rouble. Prime minister Narendra Modi’s time in Delhi has been destabilising, withdrawing large denomination notes, interfering with central bank staff and policy, and promising all sorts of things ahead of elections this spring. From a low point at 69 rupees per US dollar in early January, the move to 71 is expected to continue and take out the record high of 74.5 in October last year. A measured target based on our chart suggests the US dollar should rally to 79 rupees.
The Russian rouble’s seen some very big swings around a central rate of 64 per US dollar over the past four years, coiling in a huge symmetrical triangle depending on the price of crude oil, political attitudes to President Putin, and the threat of further sanctions. Allow for a move to 76 roubles in the first half of this year and potentially the record high at 86.
