Checking the message from Currencies

It is common practice for many equity fund managers to cross-check the message giving by other asset classes. Even though ATEC does not trade FX, we do attempt to ‘listen’ to any message which the currency market might be sending, and establish what the most probable conclusion is for risk markets overall. We believe this can be good practice for all investors, be it professional or retail.

Source: Bloomberg

The chart above shows the ADXY (Bloomberg JP Morgan Asian Currency Index). It is an amalgamation of several Asian currencies such as Aussie, Korean Won, RmB and so on. ATEC cannot remember the weights.

We will make the following points:

1. That the Equity rally which began in 2Q20 coincided with strength in the ADXY index. Hence, it can serve as a good coincident confirmation checkpoint.
2. That since peaking in early 2021, just as with Equities, the ADXY has been bound in a wide corrective range. In fact, the ADXY almost recorded a breakout in early June. This false signal turned ATEC bullish at the same time in Equities but we had to take our losses when it was a ‘false dawn’.
3. What is worrying at present, is its inability to show technical strength on RSI (cannot get into the bullish zone) nor MACD (persistently below 0). Neither is the index able to recapture its Moving Averages.

One of the Asian currencies, which is more volatile and perhaps an earlier mover (at least according to us) is the KRW — see below. The Won in recent days is showing renewed momentum to the upside (which means weakening).

Source: Bloomberg

This is coinciding with a recent call by a large U.S. house that the Memory Semiconductors industry is at risk, as there are increasing signs of end-demand fatigue in several IT device categories. (ATEC’s close broker friend had already alerted us to this way earlier in 2021. Yup, he is that plugged in).

Semiconductors in our memory (pun intended) tend to be early cyclicals, meaning we should be on the alert for whether this softening in demand does start to infect other parts of the global economy.

We believe that the message from currencies here is portentous at least for the outlook for most Asian markets. Again, the weight of evidence points bearish for now.