The Wind of Change in Foreign Exchange

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One of the oldest and most widely followed foreign exchange ~ cross-rates is the Swiss
franc / Deutsche mark cross. The reason for this is that Germany and Switzerland share
at common border and are each other’s major trading partner. Because of the two
nations’ close trading relationship, the cross-rate between the two is actually more important
to their separate economies than what happens to the U.S. dollar. It really does not matter so
much to them if the U.S.dollar is going up or down as long as the cross rate bet Keen the two
countries is stable. That stability lasted for most of the nineteen eighties (see Figure l) as the
cross-rate between the two countries traded in a narrow band between .8000 and .8600.(it takes
.8600 of a Swiss franc to buy one D.mark.) That all changed in March of 1989. It was then that
the D.mark moved over the .8600 level for the rst time since 1981! That level had previously
acted as resistance for eight years. All of this took place months before the winds of political
change started blowing across eastern Europe.
Back to the Future
Going back to the early seventies the D. Mark enjoyed a twenty percent premium over its
Swiss neighbor. That was all to change as the decade of the seventies drew to a close. During
that time the Swiss franc had become the number one currency in the world, gaining 135 percent
against the U.S. dollar and 46 percent against the Japanese yen.. The twenty percent premium
the Deutsche mark once enjoyed over the Swiss franc rapidly diminished as the decade drew
to a close. When the eighties arrived, the DMark was only a shadow of its former self as it was
at a twenty percent discount to the Swiss franc!
Forward to the Future
It would appear that with the winds of political change in the air, economic change is fast
becoming a reality in eastern Europe and in the Swiss franc / D mark cross. The Swiss franc,
once the strongest currency in the world, is fast losing ground and status to the DMark. Let’s
examine Figure (2) to see just what has happened since the beginning of 1989 to the Swiss franc
/ D.mark cross-rate. As you can see in January the cross-rate challenged its historic resistance
level at .8600 but quickly retreated back to .8500. March was another story as the D.mark
soared over that level of resistance in a series of ve waves. After the cross reached .8960 and
completed the fth wave of it’s rst leg, it dropped sharply back to its previous historical level
of resistance at .8600 That area, which had acted as resistance previously, reversed roles and
acted as a level of support. The set-back created the key counter trend second wave (more
about this later) which goes counter to the primary trend. After about four months of trading
between .8600 and .8670, the market nally sprang to life in October as it proceeded on its
third and longest leg. A series of ve waves carried the D.mark up to its best levels against the
Swiss franc since 1980. On the rst trading day of 1990 the Swiss Franc / D.mark cross closed
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out at .9233 in late New York spot trading. The four month advance completed wave ve of the
third primary wave. It was like deja-vu (all over again) as the cross-rate repeated its act of the
previous year as wave ve of the third leg was put into place. The sharp downward correction
represented a 62 percent retracement of the January 1990 high and the 1989 July low. This is a
perfectly normal set back for any bull market. However the setback should hold at present levels
and not move much lower to be considered a valid wave four.
Beyond the Future
Predicting the future is what a lot of economists try to do, but few seem to get it right. I am
not an economist but a trader, I am going to stick my neck out and predict that the Swiss franc /
DMark cross-rate will trade at par some time in the next few years. Until that time I believe that
the wave four correction that is currently underway has a eighty percent chance of holding. The
next upward leg in this cross-rate will represent the nal fth wave up in this current bull market.
I believe that this wave will take the cross- rate to the .9500/.9600 level and offer some great
trading prots. As always in speculative trading situations, exibility is the key. Remember the
old trading adage “when in doubt, get out”. It remains to be seen what the future hold’s for the
Swiss franc / DMark cross; only time will tell. The odds would favor the DMark continuing to
improve against the Swiss franc, and when you trade with the odds in your favor your chances
of success in the marketplace increase dramatically.
All references to the Swiss franc / DMark cross-rate are quoted in interbank terms. As the
interbank market represents ninety-three percent of the world’s foreign exchange activity and
has a daily average volume of over 500 billion dollars it is the one to follow. The waves or legs
shown on Figure 2 are my interpretations of R.N. Elliott’s brilliant stock market observations.
Elliott made his discovery about wave action in the early thirties. The Elliott theory is that
Traders World 238
a market moves either up or down in a series of ve waves or legs. There are three waves
that go in the direction of the major trend and two waves that go counter to the trend. As
far as I am aware, this is the rst time that this theory has been applied to true cross-rate
trading. One prediction that I can make about foreign exchange with complete condence,
knowing it will carry a 100 percent accuracy rating is this, “rates will uctuate”. Good luck
trading and watch the cross-rates. \
Adam Hewison is president of The Rich Financial Group, Inc. 4716 Chesapeake Avenue, Shady
Side, MD 20764 (301) 867-RlCH The group specializes in foreign exchange trading in both the
futures and interbank markets. Adam has just completed a major reference and trading book
on foreign exchange; in it he covers all the major currencies against the U.S.Dollar beginning
in 1972, as well as never before seen cross-rate charts Of particular note to market technicians
and traders, every trading year since 1972 has been technically analyzed for all the major
currencies; and for the rst time he shows his key indicators and how they work. The book is
EXCHANGE RATES” and is available from The Rich Financial Group, Inc. The group also
report devoted to all aspects of foreign exchange trading. Call or write for a free copy;
supplies are limited.


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