A good friend from Chile, witnessing the relentless weakening of the national currency over the past four years, asked me if there was any way to predict what might happen next?

For those not familiar with trading and who have come here just to find out what to expect from the Chilean peso in 2024, here’s what I can tell you:

1. From the end of April to around June 10th - a declining phase.
2. From June 10th to around August 20th - a growth phase.
3. From August 20th to November 1st - a declining phase.
4. Afterwards, a growth phase begins, and I will provide the end date if this forecast proves accurate.

If you're curious about how I arrived at this forecast, let’s take a look at the behavior of the Chilean peso prices over the last 20 years.

In my research, I will rely solely on statistical data to identify cyclical activity. I will not use traditional technical analysis in this study.

Exploring the Kitchin Cycle

The Kitchin Cycle, sometimes referred to as the business inventory cycle, spans roughly 3 to 4 years. It draws its name from economist Joseph Kitchin, who initially identified this pattern in 1923. This short-term economic cycle is marked by periodic variations in business inventories, which mirror shifts in production and consumption trends.

Consider the economy as a vast forest through the seasons, where each season represents a phase in the business cycle, akin to the Kitchin Cycle, which cycles every 40 months.

Spring (Expansion): Just as the forest comes alive in spring, in the economy, companies grow and thrive, expanding operations and increasing production in response to favorable conditions.

Summer (Overproduction): As summer progresses, the forest reaches its peak growth—similarly, the market sometimes becomes oversaturated with goods. Production has exceeded demand, much like a forest that has grown too dense.

Autumn (Contraction): In the forest, leaves begin to fall, and growth slows. Similarly, in the economy, demand declines, prices drop, and excess products go unsold, leading businesses to cut back on production.

Winter (Recovery and Delays): The forest lies dormant, taking time to rest and reset before the next growth cycle. In business, this period of dormancy reflects the time companies need to adjust strategies and prepare for the next expansion phase.

Just as the forest reliably cycles through seasons, the Kitchin Cycle is a fundamental rhythm in the economic landscape. Recognizing that after a period of contraction, a new growth phase will eventually emerge is essential. This natural rhythm shapes the ongoing patterns of production and demand across industries.

20 Years of USD/CLP: The 40-Month Kitchin Cycle

Among the numerous cycles identified, in my opinion, the Kitchin Cycle is the most accurate in forecasting the trajectory of Chile's national currency:

Decomposing the 40-Month Kitchin Cycle

I generally avoid relying on simplistic cycles, preferring to analyze both the overarching trends and the nuanced deviations. Within this framework, I will utilize J. M. Hurst’s approach to segment our 40-month cycle into more manageable intervals.

USD/CLP 2004-2008

USD/CLP 2008-2016

Thanks to this method, we can cover more price extremes and better predict future price fluctuations:

USD/CLP 2019-2024

The Kitchin Cycle depicted in the chart below exhibits a strong correlation with the 20-year price history of USD/CLP. This consistent alignment could serve as a valuable factor in making informed trading decisions in the future.

Beyond the 40-month cycle, I have also noticed a correlation with the Juglar cycle. Let's explore that as well.

Juglar cycle (7-11 years)

The Juglar Business Cycle, named after economist Clément Juglar, delineates recurrent patterns in economic activity, encompassing phases of expansion, crisis, and recovery. Typically spanning 7 to 11 years, the Juglar cycle provides insights into medium-term economic dynamics.

It was somewhat challenging to identify a cycle for chilean peso with a period between 7 and 11 years, as their correlation left much to be desired. However, let's consider a cycle with a periodicity of 7.2 years below on the chart.

As seen, a cycle with such a long period won't be very helpful in trading. Therefore, we'll take a similar approach as with the Kitchin cycle, adding harmonics to obtain a different result:

I can't say that the correlation of the derived cycle is perfect, but combined with the Kitchin Cycle, we may achieve a quite functional forecast.

2024 USD/CLP Price Movement Forecast

To build the final forecast, I displayed both the Kitchin Cycle and the Juglar Cycle on a single chart with the aim of identifying the most significant overlaps and interactions between the two.

Update Octubre 18, 2024.

Closing Thoughts

In conclusion, it is important to emphasize that the analysis of the Kitchin and Juglar cycles presented here represents just one of several potential cycles that may impact the market. Other cycles might also show strong correlations.

Before acting on this forecast, it is advisable to verify its accuracy. Wait until the price movement aligns with the projected trend line; if it does, you will have more reason to trust this forecast.

— Dimitry T.