Much has been said already about how the government’s tax reform package will drive the local stock market higher even past its 8,100 peak. For the mean time, the index has been stuck within a tight range with a support at 7,123 and a resistance at 7,400 while the said tax reform is currently being debated in Congress. With the monetary policy tightening program of the US Federal Reserve already communicated in the market (same with that of the Bangko Sentral ng Pilipinas), the market, it seems, is void of a fresh driver that will send the index out of its sleep. We all know that the full year corporate earnings from 2016, while generally good, have still failed to impress. This begs the question, “What will drive the local market higher in the near term?”
This is where intermarket analysis comes into play (an area that no would-be “technicians” know anything about).
One of the likely near term driver that Trading Edge is seeing is the potential reversal in the US dollar to Philippine Peso exchange rate. It’s no secret that the USDPHP pair has been rising since 2013 and in the process has led to a lot of hot money outflows from the country. Recently, the pair had appeared to be in the process of extending its ascent with an upside break from an interim consolidation (its move past its resistance at Php50.00). Theoretically, such event would drive the pair higher with a renewed vigor but in the recent case, it has failed to do so. As you can see, the USDPHP pair has just traded flat despite the recent breakout. This actually places the said break in danger of failing.
Will the USDPHP sustain its move past Php50.00? To answer that question, we look far West to see how the EURUSD exchange rate has been shaping up.
As you can see from the daily chart of the euro to Us dollar exchange rate, the pair appears to be in the process of completing a notable bullish reversal in the form of an inverted head and shoulders pattern (inverse kilroy). Note that a potential break above its neckline resistance at 1.08 may drive the pair into a new up leg and in the process lead to a relative weakness in the greenback. Now it is important to note that euro accounts for 56.70% weight in the US dollar index. Therefore, a rising euro has a heavy negative impact on the US dollar.
Now looking an the chart of the US dollar index, one can see that it is also on the verge of a breaking down from what appears to be a head and shoulders formation. Note that a fall below 99.50 may trigger a reversal and send the US dollar into an interim down leg. Such event may then be expected to spill over against other currencies like the Philippine peso. In other words, an imminent weakness in the USD may lead the USDPHP to break below 50.00. Such may in turn lead to a resurgence of foreign hot money inflows into the country which then may carry the Philippine stock exchange index (PSEi) past its resistance at 7,400.
*Consensus target price or average target price given by the major foreign and local brokers of various stocks on top of index names are available in our Equity Advisor!
For those who are interested in technical analysis or learning how to profit using charts, we have an upcoming Technical Analysis Course on May 20 & 21, 2017. For more information, you may send us a direct message here or text/call (+63) 917 899 90 09.