Ben Smashes The Dollar, Rallies The Euro

When on Wednesday (September 18th) Fed Chairman Ben Bernanke pulled yet another rabbit out of his hat, markets worldwide saw big moves almost instantaneously.  As a result of the ‘no-taper’ decision stocks and commodities rallied, bonds sold of sharply, the dollar crashed, and the EURUSD currency cross jumped of joy.

If one were to look at the big rally in the Euro this week in a vacuum, which of course is a senseless analysis…but just assuming, then one could wrongly view that the currency rallied on the back of positive economic data out of Europe.  As we however live in an ever more interconnected world particularly as it relates to financial markets, it only takes a central bank chief to burn his/hers currency while making others look strong.  Yes, economic data out of Europe has been stronger and European stock markets have rallied strongly in response to that, but the Euro trading back near its January highs as a result is something very few market participants foresaw.

The world of currencies has seen more swings than a playground in recent years, mostly due to monetary policy adjustments/manipulations around the globe.  But drawing some broad strokes around some of the major currencies such as the Euro can still be done remarkably well.

On the below chart I used the CurrencyShares Euro Trust etf (FXE) to paint the big picture of the Euro, or the EURUSD cross currency rate.  After topping out in 2008, the Euro traded in wild swings and thus far found a low in June 2010, which was followed by a big rally and ultimately after another sell-off, a marginally higher low in the summer of 2012.  Taking out the wide paint brush we can thus draw a simple down-trend resistance line and since the 2012 higher low a simple up-trend line.  Those two lines are now offering me with basic guidance when it comes to major reference areas in the Euro.

fxe multi year
With Wednesday’s rally in the Euro, the CurrencyShares Euro Trust etf (FXE) broke past a multi-month resistance point near $133, which now looks  potentially have enough momentum behind it to rally towards the February highs at $136, which not entirely by chance also would bring the currency etf toward the major down-trend on the chart above.

So those are my broad strokes on the Euro for today, and while I find them plausible, know that it only takes a couple of sentences out of Bernanke of Draghi for that matter to completely erase Wednesday’s breakout.  Welcome to the world of central planning, welcome to the reality that is 2013.

FXE year to date

 

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