I’m adding an image from a comment by “Stan” on this article at Small Dead Animals:
h/t to Another Ian for pointing to it ;-)
On the various talking head TV shows there is an ongoing drumbeat of “End Of Life As We Know It!!!” and “Financial Doom In Our Time!!!!” coverage of the BREXIT. Do the charts support that interpretation of the market moves of the only trading day we’ve had?
In my opinion, no.
Lets look at a bit of the hype and the reality. I’ve heard several folks now say that the £ is at a low not seen in … then they pick various numbers. They keep getting longer, despite no currency trading happening at the moment. Sigh. So what is it? 20 years? 30 years? What? Oh, and they never mention what ‘cross’ they are looking at. Against the ¥? The €? The Swiss Franc? The $US? It makes a BIG difference.
Currency Wars, The Long Horizon
Here are a couple of long term graphs of currency crosses. They each tell a similar story, with variations. I got these from Finviz here:
One thing that always causes me heartburn on currency crosses is figuring out “which way is up”. This is measured in that and sometimes that is measured in this and an up in that can be a down in this and… Sigh. Add in that for historical reasons some crosses have the $US first, others the £ and it gets a bit of a mess. In this case, we have the £ in $US. It is about $1.40 to buy one £ and a ‘weaker pound’ is lower on the graph.
Measured in the rubber ruler of $US, the pound is quite low. Yet 30 years low? It is in the noise band of a match to 2009 and 2001. Furthermore, the great loss of relative value was 2009, not now. Frankly, we’ve got one day of panic trades as the major houses were “on the wrong side of the trade” and desperate to get out of positions before a weekend. Having it spike down and recover (as it did) is hardly a surprise.
Note, too, that this graph confounds $US strength with £ weakness. We need to look at the other two major currencies to get more clue as to overall performance.
On this chart, we have the € in £ terms, so weaker pound is higher.
In many ways, this is the graph that matters. As an EU member, it is compared to the EU that has been the major cross of interest. Here we see the spike up at the end, but it is relatively tame compared to the total range. Compared to the € the £ is the weakest it has been since about 2 years ago… Suddenly not so scary, eh?
It was far weaker in 2009 to 2011, and is roughly a match to 1994 through 1997. If “exchange rate stability” vs the Euro Zone was a major goal (and it ought to have been) having “basically no change” in 22 years but with wobbles on major events is exactly what would be expected.
Taken together, those two graphs say to me that the present “record low” £ is really a high $US. Certainly not anything exceptional in € terms.
Just to round it out, let’s look at Yen. Divorced from the whole Euro Zone thing, unconnected to the $US, a major currency. Fairly unbiased ruler. On this graph, weaker £ is lower.
Golly. Rough match to 2014, 2009 and 1996, with strong excursions on various panics. Once again we also see the major damage was done in the 2009 Financial Crisis and that recovery from it was weak. (No real surprise as governments set about breaking banks and damaging earnings, and London is a major banking center).
Taken together, those three charts show me a one day panic as traders were on the “wrong side of the trade”, and not much long term history making. The £ is low, but not exceptionally so and the major issue is $US strength. Compared to the € it is absolutely unexceptional.
As the week unfolds, a lot of folks will be setting new bets on currencies. The most extreme volatility ought to be past, as traders cashed out big time on Friday. By the end of the week, I expect it will all be over. With that said, the chart is your friend and who knows what fresh hell of stupidity the political class can inflict. So watch the news.
I’ve found a couple of charts of the DAX index and FTSE. Being an index it ought to be free of $US contamination. So where are the two major markets in the EU as of Friday? FTSE first, then DAX.
Both near the end of long secular bull runs up. Both “toppy” with “failure to advance” to the upside the last few years. Both with recent lows forming a base. Very similar, IMHO, to the USA markets.
I’d expect that kind of long term high to result in a break lower. Any excuse will do. In my opinion, BREXIT is just an excuse for the shorts to try running the markets down. It is what they do at the end of every secular bull run.
The panic day barely shows up at this scale, and I’d not expect it to show up. That the DAX took a much larger hit on Friday than did the FTSE says, to me, that Germany is in worse shape out of BREXIT than is the UK. That makes sense as they sell more to the UK then they buy, so any trade fight hurts them most, not the UK.
With that kind of long term ‘set up’, I’d wait before doing any bargain hunting. On a trade basis, there is usally a 3 day cycle. Sometimes only two. Mid-morning Monday ought to be a nice time to reevaluate on a rebound trade (i.e. an oversold buy for a one or two day holding period bounce). But that secular high argues for a longer term reversal to a downtrend, BREXIT or No.
Watching the divergence between FTSE and DAX ought to be very interesting…
I’m not seeing a reason to jump in big time just yet, but a potential rebound day trade is shaping up. The £ ought to recover in the next week or two, the € not so much. In no case am I seeing anything particularly “historic”. Just regular trade stuff.
The major message seems to be that the $US is out of whack with Europe. But we already knew that…