DAVID FLOYD: Hey, good morning, good afternoon, or good evening, traders, depending on what part of the world you're dialing in from. And welcome to Real Vision Access. My name is David Floyd of Aspen Trading Group.
It is Friday, January 3, and we've got a very exciting show on tap. Not only do we have some really intense volatility due to the Iranian situation, which of course is not what we were planning to talk about today-- but it will certainly factor in-- but we've got a really great guest today.
And I'm really excited to be sitting down with Peter Brandt of the Factor. And he's coming to us today from Arizona, a good place to be at this time of year if you're seeking out the warmer weather. And we're going to be talking about the euro today.
Peter's done a really interesting study on turning points in the euro over the years. January, based on Peter's research, tends to mark either a significant bottom or a significant top in the euro. So it's going to be really interesting to get his insights today on where he sees the euro going. Naturally, knowing what the tendency is to be is fantastic. But the key part, which we're going to dig into quite a bit, is, do we go long? Or do we go short the euro?
So without further ado, Peter, welcome to the show. Great to have you. I'm excited to dig in. So why don't you take us through all these slides? And let's have a conversation about this.
PETER BRANDT: Well, hey, thanks, Dave. And thanks for inviting me to be on. I appreciate it. I always appreciate addressing the wonderful folks that tune in to Real Vision and the tremendous content that Real Vision makes available to them.
What you see there on the chart is basically the plot of the euro currency that goes back to the very early 1970s. So you can basically say it's a half-century chart. Now, keep in mind the euro currency, the euro unit as an official currency, really doesn't go back that far. It really goes back as the accepted default currency of the European Union to about 2002.
And so prior to that, what's plotted is really the trade-weighted currencies of other European units-- the Deutschmark, Swiss francs, French franc, and so forth-- based on trade-weighted average. And so this really becomes a proxy for the euro currency prior to 2002. And as this chart shows, the euro currency or its earlier proxies has been in really an uptrend against the US dollar for the past half century.
But more significant than that is something that I'll call the January effects of factor, the January [INAUDIBLE]. There is a very, very strong tendency for-- I'll use the term you used, "turning point," for the euro currency to establish its annual low or high in the first four to five weeks of each year. If you think of a single month, it really only represents about 8% of the year.
But nevertheless, we've seen the high or the low or the turning point in the euro currency take place in full 79% or 80% of the years that we've had during the last half decade. And that's a remarkable rate.
As a matter of fact, in 38 of the last 48 years, we've seen the annual top or bottom in the euro in the month of January. Not only that, the average gain or loss off of that January high or low has been 20%. And of course, we've had significant ranges in that.
But you can go even further. We're in the first year now of the new decade. And if you go back and take a look at the first year of each decade back for the last half century, we find that there's been well over a 20% change from the January high or low. And the January effect has worked, has been effective in each of the first year of the decades going all the way back to the 1970s.
And so it's a very significant factor for people who are traders and who are looking to position themselves for a significant move. If I were to tell you-- and of course, you would know this, Dave-- if you have an 80% certainty that you're going to see a market make a high or a low in a particular month, and that was an edge that you had in the market, that would be considered, of course, a significant edge. And so that's what we have.
Now we're taking a look right now at-- if you roll back to slide number 3, I'll point something out in slide number 3. And of course, those folks who have access to these slides, without going back there, slide number 2 just takes us through the January effect year by year by year going all the way back to 1970.
This is slide number 3. And what we're showing here is the fact that the euro currency right now is in the lower 12 and 1/2% or almost the lower 10% range of this accelerated advance that it has had against the US dollar over the last 48 to 50 years. And so from the standpoint of looking at value or looking at trend, one can use this to argue that the euro currency has valued down in here. It is at the lower end of the range that we have seen over the last half decade-- in fact, at the lower 12 and 1/2%.
And so these red lines show an accelerated or a graduated advance in the euro currency against the dollar broken into quarters or, in the case of the lower two channels, 12 and 1/2% range. So one would expect that this lower boundary in this lower quadrant would represent a support area for the euro currency from which we could see in advance moving forward.
If you go on to slide number 4-- and what I'm trying to do is just put together a composite of looking at the market. And what are the probabilities of either having the January low or a January high?
Dave, you're a technical trader. And you know that fundamental analysis takes a look at outside factors, outside influences upon price in an attempt to make a forecast price, where technical analysis looks at price alone. What does price tell us about what price might do? And technical analysis by no means gives us certainties in the forecast. But it does give us probabilities. And sometimes probabilities is really the best thing we can go to.
On this chart, which is, by the way, a weekly bar chart or candle chart of the euro currency, you'll see that lower dashed line represents that 50-year or half-decade trend, which we're coming down toward. And on the weekly chart, you can also see that the market here for the last year or so has been declining in the form of what chartists call a "wedge" or a "falling wedge."
And falling wedge, more often than not, can really give us a more definitive idea upon which way markets are likely to go. Based on the fact that we're coming down to a 50-year trend line, based on the fact that oftentimes falling wedges are resolved by an upside move, I'm tending to lean toward the fact that we're going to see a January low this year.
And if you go back through history and really take the assumption that we do see a January low or high 80% of the year, then step forward in faith and say that 2000 has a probability of being a January low, that's the direction that I'm looking at this point-- is, how do we find a low point to trade the euro currency out the long side against that 50-year trend line? Should we break out to the upside of this falling wedge period?
And again, going back to an average advance from the low of the high of the January pivot point of 20%, that's a significant rally that we could have if we can correctly time a long position in the currency. Go on to slide number 5, if you would.
DAVID FLOYD: Peter, I just want to chime in with one thing here that I think is really important. And again, a lot of traders-- I would say the majority of traders, shorter-term traders, medium-term traders, maybe not as much on the investing side-- they do tend to be technically oriented. And I think you and I and all others would probably agree on the merits of technical analysis.
But I think the first part of your presentation here is something that is really important. It's bringing in other factors. Obviously, people bring in fundamentals. But what I would call something like slide number 2, where you've got all of this empirical data, what I would maybe call "quantitative data"-- I think that is such an important element for traders in this day and age.
We've got the computer power to run all these numbers and come up with these really interesting data sets. I think a lot of people tend to look at just charts in isolation. And while that may work for them, I think bringing in these other factors that you're discussing with empirical data points can really add a lot of value.
Of course, we're getting to the point in the presentation now where-- how do we use that information? How do we identify if it's a low or high? And I understand how you're peeling the onion away here. But I'd like to hear a little bit more about not only just in terms of the euro. But how often do you bring in some of these other data points to confirm or maybe refute what you're seeing from a technical perspective?
PETER BRANDT: Well, charts show us where we are. Personally, while I'm a chartist-- and I've been a chartist since 1975. I've been a trader since 1975. And I trade based on charts. But it's important to remember that charts don't necessarily predict the future. They show where we are. They show the path of least resistance. And we take it from there.
So I think it's always good to look at charts within the framework of a bigger picture. Is there a bigger picture that can be told? And that bigger picture may be based on a much longer-term chart. But it also can be based on what might be perceived as dominant fundamentals. And it comes back to the very question-- is, why is there a January effect to begin with? Why is there this tendency for the euro currency to bottom or top in the month of January?
And I think that there is a global macro reason for that. And so that's where it falls into technical analysis. Corporations make big decisions on where their money is placed and how they are going to operate in the year ahead based in January.
And so we see corporate treasurers across the world moving money around, positioning money for the year ahead, which takes place sometimes toward the end of the year. They make these annual decisions. And so I think the January effect comes from the fact that we see corporations, as well as governments, squaring their books, positioning themselves for the period ahead during that month. That's what gives us the January effect.
And I think you can even carry that back and say that takes place also in a decade-by-decade basis, where you have corporate planning coming in on 5-year plans, 10-year plans. And so even that first year of each decade, we can see an acceleration of this type of influence that comes into bear in these foreign currency exchange rates.
And so absolutely. I think that's true, Dave-- is that there is kind of a fine line between technical analysis and global macro considerations or fundamental considerations, where we determine which direction to face-- northeast, south, or west-- based on some of these larger factors. And then we gear in at the charts and say, how can we use the charts to gain an asymmetrical bet? How can we use the charts to time a trade in the direction of what we believe will drive the market in the period ahead? It's a good point, Dave.
DAVID FLOYD: I appreciate that. So using that as a perfect segue, let's dig a little bit deeper. You've got a series of charts here that give us a good snapshot of decade by decade. And it ultimately leads us to where we are right now. So why don't you walk us through some of those because I think gaining that perspective and hopefully dialing into where we think we might be going will be very useful.
PETER BRANDT: OK. Well, again, taking a look at some technical considerations, the chart that we have on right now, which, by the way, I believe is slide number 5 in the packet-- this is the Commitment of Traders, CFTC Commitment of Traders. What this shows us is the positioning being held by commercial interests-- not by the speculative public, not by individuals who trade the markets, not by hedge funds, but by commercials, by banks, by corporations, and so forth.
And this is valuable information because from my standpoint, I always want to try to be on the side of the market by people who know most about the market. And that's the commercials, not necessarily the speculators. And so oftentimes what we will see is extreme positioning profiles by commercials. And we can take positions in the direction of that as well.
And in this case right now, we don't see an extreme. The commercial positioning in the euro currencies right now is really kind of a neutral territory. And so there's nothing dramatically to be gained to say, OK, I want to be long or I want to be short euro currencies, because that's the bet being placed by the large commercial interests. And so I'm showing this basically with the conclusion that there's no real insight based on how commercials are positioned at the present time.
Again, going back to slide, let's say, number 4, rolling back-- I hate to jump around. But I think I will to make the point here. Again, we come back to this slide, which is the weekly chart, which shows that we are now starting to move toward major support on the 50-year trend. And we have this wedge. And so from that standpoint, I'm kind of saying and thinking to myself, OK, I want to think in terms of a low.
Now, this doesn't mean that there aren't other global macro factors that might lead one to a different conclusion, one being interest rate differentials. Generally the comparative interest rates of the sovereignty behind a currency unit can play a big part in which way foreign currency markets move.
And the US has higher interest rates than really what we're seeing in the European Union at negative interest rates. And that favors the US dollar, of course. So one has to be aware of that. But generally speaking, I just think that the stars line up to be going along the European currency unit, which means I'm looking for a January low because 80% of the time we do make that low or high in January. And so that's kind of the way I'm leaning.
Just touching base on a couple other charts that we can go through here, for those who have the packet, they can really go back through decade by decade. Now I'll just briefly go through here without making too many comments on them. Slide number 6 gives us a look at the European currency in the 1970s. So we can take a look and see what happens in the European currency in the first decade of this half-century period.
Slide number 7 take a look at what happens in the 1980s. Slide number 8 takes a look at the 1990s, which you can see was a big V move back then. And there are oftentimes reasons for that. And then we go to slide number 9, shows us the 1990s. Slide number 9 was the 2000s, slide number 10 the 2010 period, which brings us up to where we are right now.
And that takes us to slide number 11, which, again, takes a look, in this case, at the US dollar index. Keep in mind that the US dollar index and the euro currency tend to trade in inverse relationships. When we have an advance in the US dollar index, it really represents a decline in the euro currency and the other way around.
This is your chart, Dave. I'd love to hear your thinking on this chart because I don't necessarily make a claim on truth at any given time. I only make a claim to my own opinions. But I have great respect for you. How do you read this thing?
DAVID FLOYD: Well, I'm looking at it from a bearish perspective, which, of course, given that the euro and the dollar index are inversely correlated-- not perfectly correlated, but they're pretty tightly correlated-- I'm seeing prices move lower. Again, just using very basic technical analysis here, we've made new highs all the way throughout 2019.
And you'll note on the bottom part of that chart is the composite index, which is basically just a momentum gauge-- that that momentum index or that composite index continually moved lower. So we have what a technician would call a "bearish divergence," prices making new highs, momentum not confirming it.
Then we had a simple break of a trend line. Looks like this is a weekly chart. So it's probably back in December, maybe November. And we're also back below the 61.8% retracement of that initial leg lower off of the-- looks like the December 2016 high. So again, a very basic technical analysis, nothing terribly complicated. But to me, it looks as though the momentum is starting to favor a move lower, which, of course, would suggest that the euro would move higher.
And that's the way I'm leaning as well when I look at some of the other things that are on my radar screen. There's a data point that we'll get to in just a moment that brings in what you did with your analysis of the January effect. I'm looking at some data points from Nautilus Capital that we'll talk about in just a moment that also suggests that the dollar index will move lower.
But I want to ask you a question. One of the things that we've all noticed if you're trading in the currency markets recently is that the volatility in FX-- I don't know if it's at all-time lows or it's pretty darn close to an all-time low. And of course, FX traders are bemoaning that.
And yeah, I mean, the volatility is really low. There are still some trades. But the frequency of trades is way down, for sure. Does volatility-- I don't know if you've ever looked at this. But does the lower or the high volatility in terms of FX factor into this at all? Or is that something you hadn't looked at?
PETER BRANDT: Oh, no. I'll tell you, I think that you're absolutely right. Those who trade foreign currencies have been moaning in the last three years, saying there's no follow through. These markets are choppy. They start to develop momentum, and then it fails. And so the historic forex traders have been very frustrated by the last three or four years because we've seen that very thing.
But I have