Chart of the Day: Rolling Bear Market in Various Currencies Since 2007
In yesterday’s daily note, David Rosenberg showed us this chart of the wild swings in the foreign exchange markets since the beginning of 2007.
His interpretation of the chart is that it demonstrates a "series of rolling currency depreciations" in a beggar thy neighbour world of weak aggregate demand. The competitive currency devaluation theme recently caught fire because of rather pointed remarks by Brazilian finance minister Mantega.
Right now, the dollar is depreciating against most major currencies including the yen, the Swiss franc, the euro and the yuan. The Japanese have intervened to prevent further appreciation. Marc Chandler’s currency team at BBH noted in the early morning European note that:
The Aussie dollar climbed to the highest since July 2008 vs the greenback, with AUD/USD peaking at $0.9693, while USD/CHF continued to trade at record lows, down as far as CHF0.9738. The dollar index hit a 7-month low today, and has dropped more than 10% since June 7.
When I saw the Rosenberg chart, competitive currency devaluation was not the first thing that came to mind. But clearly this is something to watch for as a source of global economic tension. With the Euro back up to 1.36 and above, the situation becomes particularly acute in the euro zone.
The US Dollar, $USD, is oversold at 78.78 on 9-29-2010. Should the Euro FXE, be called lower by the currency traders, then stocks will go down. Better said, when the, EUR/JPY, that is the FXE:FXY, fall, then the stocks will go down and Volatility, VXX, will pick up.
Banks KBE have fallen below support of 23. And European Financials, EUFN, have fallen from support of 22.5. Stocks could fall lower 9-30-2010 or 10-1-2010.
I am bearish stocks due to regional news coming out of Europe, such as the EU Banking Sector Stability Report for September 2010, produced by the ECB relates funding difficulties for a number of European banks.
I am bullish gold. As carry trade investment comes out of gold, it is likely to fall under $1,300 for a period of time, before it moves once again, substantially higher.
The Fed may announce QE 2 on November 3, 2010. If it does, it will be gold inflationary.
I had been thinking it wise to go short the market, as the EUR/JPY, has reached full expansion, but after reading Tyler Durden’s article … Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame … I’ve concluded that further fiat asset expansion is possible if the Fed does come out with a surprise QE 2.
Yes, QE 2 may come November 3, 2010, as the Federal Reserve may announce a plan to buy US Treasuries, it may simply print Dollars, yes simply print and print and print; and buy US Government Debt, to prevent a deflationary collapse.
This of course would send the value of the US Dollar, $USD, plummeting, and would be quite inflationary to many assets, such as food commodities, FUD, and especially gold, $GOLD. I think it wise to buy gold, specifically gold coins, at this time, even though a Surprise QE 2 is likely coming on November 3, 2010, which may create a demand for SHY and IEF.
I’ve provided a link to my ChartList Site with Stockchart.com charts for your review and analysis.
https://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID4019834