Currencies- A cyclical view

Generally speaking, people not involved in the markets tend to view currency swings with

scepticism; thinking that the whole thing is just random, with price swings that have no

longevity or science behind them whatsoever; merely all just supply and demand and

subject to so many immediate and unpredictable variables.

Well, that certainly might be the case in the very short term, but over a longer time horizon

that notion simply isn’t true. Currencies do often move, following long term trends, with a

great deal more discernibility than many people think.

For example, if I look back to 2012 and at the USDJPY, which moved from around 75 to 125

over the course of the ensuing 3 years- a JPY devaluation of nearly 75% during that period. I

don’t think a move like that can be assessed as just random. To the technical expert this was

a readily identifiable and clearly defined trend.

To really exaggerate that point, one could even look back at the pound versus the dollar

since the end of WW2 and see just what a mega-downtrend that has been, and one that’s

incidentally yet to be reversed! In 1946 the there were $4 to one Pound and look where it is

some 70 plus years later.

Ok perhaps that’s taking things to an extreme, but I hope you get my point? Currencies do

move in cycles and do follow trends over the longer term. Its just that all the ‘white noise’,

ups and downs, toing and froing in between make it very difficult to see the wood for the

trees a lot of the time. Hence, taking advantage of those cycles is not just difficult, its an art

form in itself and requires a lot of patience, and more importantly, as with so many things in

life; extremely good timing.

What has been a noticeable trend for more than 30 years is the cyclical nature of the dollar

within any given year in that it often fluctuates over a quarterly basis. For example, if the

dollar is strong in the first quarter of any year, then often that strength is unwound in Q2,

followed by a reversal back the other way in Q3 and so on and so forth.

Naturally it doesn’t necessarily follow any set pattern, or confine itself exactly to just one

quarter, and a lot depends on where it might have started off the year to begin with.

Irrespective of all those nuances and as an example; let’s see how this dynamic has played

out so far in 2018.

Q1 of this year saw the dollar come off sharply as the USD index fell back from a rebound

move in Q4 2017 that had taken the price up, from around 90 to above 95. The subsequent

Q1 2018 sell-off then took the price back down a low of 88.25 in March.

A rebound then took place in Q2 and Q3 which led the USD index eventually back to above

97. Since then, as Q4 unfolds the price has been trading in the middle of its most recent

range, between 94 and 96, but many pundits are calling for another relapse into the end of

Q4. That may or may not happen of course, but I hope this price history lesson, if nothing

else, is a good example of just what I am talking about?

Key Data releases due this week

15/10- 1.30pm US September retail sales

16/10- 9.30am UK Aug/Sept Unemployment report

17/10- 9.30am UK Sept CPI/RPI inflation report

17/10- 7pm US FOMC minutes from Sept policy decision meeting

18/10- 9.30am UK Sept Retail sales

19/10- 3.00am Chinese Q3 GDP report