BigTrends

One of the key indicators I'm watching in this market is the Euro (in addition to bonds TLT, discussed here).  I prefer to use the CurrencyShares Euro Trust (FXE) because it it is very liquid in both the underlying and its options.

The key here is that many hedge funds and institutions have "short Euro" plays on.  When/if these begin to unwind or get reversed to the upside, we will see Euro buying and selling in assets such as Gold.

Recently the FXE has shown signs of life, see the chart below.

FXE Daily Chart


You can see the downtrend in place on the Daily chart since December 2009.  However, we see some indications that the bounce in the Euro may have some legs.  Percent R has crossed into clear bullish territory above 80 for the first time in this downtrend.  Also, we are now 2 trading days above the 40 day exponential moving average (purple line).  Previous rally attempts failed at this trendline and reversed lower, with a 1 day blip above in April.  Closing above that ma today should be considered a confirmation, and the 40 day and 20 day exp moving averages should now act as support on pullbacks.  They lie around 124 and 123 currently.

Big news was made today as China announced plans to loosen pegs on its currency versus the Dollar.  This was conveniently announced ahead of the G20 summit of global leaders later this week.  I've previously mentioned that I anticipated some economic announcements ahead of the summit in attempts to stabilize global economies.

As with most everything China does, this likely has motivations to benefit China  on an economic and political  basis.  Sometimes it appears that they are playing a very long-term game of chess in order to conquer the world economy, while the USA and other western economies are playing short-term checkers.

Is a free-floating Chinese yuan a good thing for the world?  As a free trader, I say yes long-term, definitely.  However, this particular move today when examined closer isn't anything approaching that.  For an in-depth look at the move today, take a look at this article.

How does this affect the American economy?  Well if the Yuan gains value versus the Dollar, then it makes the price of so many things more expensive to Americans, which hurts our buying power and causes potential inflation.  Take a look at how many things in stores such as Wal-Mart and Home Depot are made in China.  Nowadays, everything from Food to Drywall comes from the Asian giant.

On the flip side, many are crowing that our American-made products will now be cheaper for the massive number of consumers in China to purchase -- which will benefit our exporting companies and economy.  This may be true to some degree, but remember that China doesn't play fair when it comes to trade ... and China's policies always look out for China first.

On a side note, history may be a bit of a guide when it comes to this.  Remember when Japan was the emerging Asian economic giant in the 1980s and accused of protectionism, unfair trade and devaluing its currency to dump goods in the USA?  Well, China is rapidly on the path to being a "mega-Japan" in terms of influence and economic power.  However, they don't have the demographic and natural resource weaknesses that Japan did -- but they do have their own massive problems with corruption and bureaucracy that must be fixed.

We welcome your thoughts, opinions, and facts on this topic, please reply in the comments below.

The currency markets are in turmoil this morning as Greece is bailed out.  As expected the Euro is facing increased selling pressure and is currently off 1%, which places it near 10 month lows.  In contrast, the US Dollar has achieved a quid pro quo and is up 1% on the news and is near 9 month highs.  

Today's impact is significant on both currencies -- It looks like the US Dollar Index ETF (UUP) is breaking out based on recent price action.  In testing those 9 month highs UUP has moved well above its 50 day moving average while the same moving average has now crossed and confirmed above the 200 day moving average.  As of now, the up trending channel shows resistance at $24.25 on UUP, perhaps this is the target for many long USD traders. 

If nothing else, we'll see commodities, like oil (USO) and gold (GLD) fall on the strength of the US Dollar.  

PowerShares US Dollar Index Bullish (Prefer inverse ETFs? UDN is $ Bearish Index) – Click to Enlarge

We currently see the dollar hovering around the mid-Dec level, where a big surge in the greenback took equity markets down 30% or more. The real issue here has become one of credibility and reliability, specifically from treasury debtholders who have a future claim on our economy. A falling dollar may be good for exports and cleaning up on buying commodities but it does no good for the value of the debt. The continued monetization of the US debt is a dangerous game.