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Chart In Focus

British Pound’s July Turning Point

 
Chart In Focus
 
June 18, 2015


I will confess that I am not a “currencies guy”, although one of my early experiences with trading did involve currencies.  I was stationed in West Germany (so-called then, before the fall of the Berlin Wall in 1989), and I lived “on the economy” instead of in Army housing.  That meant that I had to procure Deutschemarks in order to pay my rent every month.

In those days, the Armed Forces Network (AFN) of radio stations would broadcast the exchange rate applicable for the next day at 1400 (2 PM) every day.  But the Army Finance Office where we could exchange dollars for D-marks did not close until 1530 (3:30 PM).  So if there was a big change in the exchange rate, one could either wait until the next day to exchange one’s currency, or high-tail it down to the Finance Office before 1530 to take advantage of a unique currency arbitrage opportunity, depending on which way exchange rates were moving. 

One problem with this great “opportunity” was the $700 per day limit on currency exchanges allowed at the Army Finance Office, so there was a limit to how much one could take advantage of the changes in currency values.  Still, the realization that the effective amount of one’s apartment rent could change by as much as 5% in a single day did tend to focus the mind on paying attention to such movements. 

With all of that in mind, there is something I have noticed in the currency markets which may be of interest to some readers.  I like to watch the Commitment of Traders (COT) Report data on a variety of futures contracts, and I report on the interesting relationships that I find there each Friday in our Daily Edition.  Mostly that interest is out of a concern for what the movements in the dollar might mean for the price of gold, or for the stock market, which are areas where my main interests lie.  But along the way I noticed something interesting about the British pound, as depicted in this week’s chart. 

As the exchange rate for the British pound versus the dollar has risen this year, the commercial traders (the big money, and thus presumably the smart money) have been paring their once-big net long position.  It is normal and understandable that they should take profits as prices move in the direction of their once-big bets.  When the commercials adopt a largely skewed position, either net long or net short, it is a good bet to side with them.  They may be early, but they are usually right in the end.

But there is something funny about the movements of the British pound.  Every January and July, there is a meaningful turning point.  Presumably this has something to do with mega-bank movements of large quantities of capital, and for reasons that make sense to the bankers even if they do not make sense to me.  I don’t have a good explanation for it. 

This is all relevant now because July 1st is coming up, and thus presumably a new turning point.  One frustrating point is that there is not a reliable pattern of these dates marking either tops or bottoms.  Instead, these dates mark turning points for whatever trend is then in effect, and it is left to the chartist to look at what prices are doing at the time, and then to figure out whether a reversal would mean moving upward or downward.  

With the British pound now up to is highest value versus the dollar thus far this year, it is not a stretch to guess now that the upcoming turning point will be a top leading to a move downward.  There are no guarantees, just a long history dating back to before the time period shown in this 3-year chart which shows that it is a repeating and enduring pattern. 

For those who care more about the 800-pound gorilla of European currencies, namely the euro, it is worth noting that the same January and July pattern of reversals is also present there, although not quite as neatly as what we see in the British pound.  

euro currency and commitment of traders (COT) report data

The January turns are specifically a bit less punctual for the euro, but the July turns arrive pretty reliably at the beginning of the month of July.  The implication of all of this is that the dollar should see an upturn of some extent, thanks to this pattern of reversals in both the British pound and the euro, on or about the first of July. 


 

If you are in the Houston, TX area, you may be interested to know that I will be speaking at a meeting of the Houston chapter of the Market Technicians Association (MTA) on Wednesday, July 8, at 6 PM.  There is no price for admission, and all are welcome to attend, although preregistration is required.  You can get more details and sign up to attend the meeting by visiting http://news.mta.org/event/houston-chapter-meeting-featuring-tom-mcclellan/?instance_id=2982

Tom McClellan
Editor, The McClellan Market Report


 
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