Overseas fund translation after the European currency break

Keep the equity trend and the dollar apart

A broad world stock index can be read in local currencies against a 10-week moving average, with the US dollar kept on a separate chart instead of using a dollar-converted equity series. A local-currency index leaves that world equity gauge in domestic units so currency conversion is not mixed into the equity reading. A dollar index is the separate US-dollar series used to isolate translation effects from local-currency equity action.

An overseas mutual fund can stand in for a foreign stock index when the fund is chosen because it tracks that index. That index-proxy fund avoids thin trading and sparse company-level information in individual foreign shares.

Intermarket analysis means reading equities, policy rates, and currencies together so a break in one market is treated as a regime shift for the others rather than as an isolated chart event.

Rates, parity, and the September break

High German interest rates after reunification, set to attract capital, weighed on global equities through most of 1992. Charts mark 14 September 1992 as the European currency-crisis date, linked to those German rates forcing other European Community members to hold rates and currencies at parity despite recessions.

The crisis produced a realignment of the European rate mechanism, the 1992 European currency-parity arrangement that required members to keep rates aligned with Germany until the September break. After the United Kingdom left that mechanism and cut rates, the S&P 500 turned up from a summer-to-early-autumn double bottom.

What the dollar and the fund did next

After 14 September 1992 the US dollar rose as capital left European currency disorder, and a world stock index turned up soon after the same date. A rising US dollar accompanied the S&P 500 lift from its lows. When the dollar stalled near 95, the S&P 500 slowed while other global markets continued to advance.

A dollar-priced overseas fund kept falling while global stocks rallied and the dollar appreciated, then bottomed as the dollar broke down and the fund crossed above its 10-week moving average. The moving average here is a fixed-lookback average of weekly prices used as a trend baseline, a 10-week line on the local-currency world index and on the overseas fund.

When translation offsets the asset path

Results in an international fund combine the path of the underlying assets with currency translation, so the two effects can add together or offset each other. Currency translation is the extra gain or loss a home-currency holder receives when overseas assets are converted through a changing exchange rate, separate from local-market price change.