From Singapore Business Times
4 Aug 1999
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Watching the 'gaps' on the ST Index
And why the US dollar looks a sell on rallies
By Larry Wee
D
ESPITE decent corrective strength for the US dollar in Asian trading yesterday, the past week has seen the first signs of a potentially more difficult period for the US economy. So any short-term rally in the US dollar or the Dow may well, on balance, render both vulnerable to a fresh barrage of selling orders. And such orders will build up if the greenback's rally is capped at the following key levels over coming weeks: 117.40 to 117.70 yen; S$1.6940 to S$1.6970; and US$1.05 to US$1.0550 per euro.
Essentially, the latest slew of statistics suggests slower US growth, but -- more ominously -- the threat of higher inflation. As a result, the benchmark 30-year US treasury yield hit a high of 6.18 per cent on Monday evening, just shy of the year's 6.2 per cent high.
Some analysts are already bringing forward the next US rate hike -- from 5 per cent to 5.25 per cent -- to the US Federal Open Market Committee's next meeting on Aug 24.
Closer to home, the Singapore dollar continued to be the most obvious Asian beneficiary of the yen's resurgence to a five-month high of 113.90 yen against the greenback on Monday. But there is a caveat: chartists say the "double gap" in the benchmark Straits Times Index's impressive 8 per cent jump last week warrants some attention.
Upside gaps are formed on charts when an index like the STI starts trading at a higher level than where it ended a day earlier -- leaving a hole or gap between the two sessions. We witnessed such gaps twice this year, on Jan 7 and April 19, but there were corrective downmoves to "fill the gap" within a fortnight -- something which any true-blue chartist will tell you must happen if the index is to resume its climb.
This is perhaps a further sign that there may be a chance to sell the greenback a little higher against the Sing, if these gaps force a 100 to 200 point STI correction.
The broader picture, however, is that a slowing US economy, and the threat of using higher US interest rates to head off inflation, is negative for both US stocks and the greenback. Indeed, we detect a growing feeling that both are likely to experience a volatile and difficult August. One research house, IDEAglobal.com, is in fact warning of a fall of as much as 10 per cent for the Nasdaq composite index this month.
Apply this 10 per cent correction to the S&P 500 Index's July 19 high of 1,420.33 and we get a downmove to 1,278 -- 50 points off Monday's 1,328 close.
But what's really significant for chartists is that 1,278 is also important technical support: It's where a couple of what's called Fibonacci retracement ratios coincide, and also marks a "triple bottom" formed on May 26, May 27 and June 2 this year. Coincidence perhaps, but worth bearing in mind.
And despite the greenback's losses last week, there are some who believe that the market may still be caught a little overbought of US dollars: more against the yen than the euro, but also against the Sing dollar.
At least part of the explanation for the Sing and yen's recent strength, we maintain, is the unravelling of short yen and Sing positions against other Asian high-yielders. But it can be argued too that it is precisely the attraction of such high yields that would make players only trim such positions, not cut them out altogether -- which then adds to the pool of potential Sing and yen buyers on any greenback rebound.
The Sing may also have found favour for other reasons. Besides the promise of strong upward revisions in Singapore's 1999 growth, a measure of flight-to-quality plays -- away from North Asia -- could well have played a part.
If we again see a corrective downmove of the STI -- back to the July 27 high of 1,999 -- then it could just provide better levels at which to buy the Sing.
But a strong impetus from the Prime Minister's National Day Message this Sunday may result in yet another upside gap in the STI from this coming Friday's close. Now that could create what chartists call an "island" -- formed by the seven sessions between last Thursday and this Friday. And if you believe the charts, such island formations signal that earlier gaps need not be filled.
This would likely mean that the Sing dollar will become even more expensive.
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