When Federal Reserve Chairman Ben Bernanke pulled yet another rabbit out of his hat Wednesday, markets worldwide saw big moves almost instantaneously. As a result of the “no taper” decision, stocks and commodities rallied, bonds sold off sharply, the dollar crashed, and the EURUSD currency cross jumped for joy.
If one were to look at the big rally in the euro this week in a vacuum — which would be a senseless analysis, but just assuming — one could wrongly deduce that the currency rallied on the back of positive economic data out of Europe. However, as we 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 (FXE) exchange-traded fund 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 found a then-low in June 2010, which was followed by a big rally, and ultimately — after another selloff — a marginally higher low in summer 2012. Taking out the wide paintbrush, we can thus draw a simple downtrend resistance line, and since the 2012 higher low, a simple uptrend line. Those two lines basic guidance when it comes to major reference areas in the euro.
With Wednesday’s rally in the euro, the FXE broke past a multimonth resistance point near $133, which now looks to have enough momentum behind it to rally toward the February highs at $136 — that, not entirely by chance, would also bring the currency ETF toward the major downtrend 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 or Draghi to completely erase Wednesday’s breakout.
Welcome to the world of central banking in 2013.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free Weekly Market Outlook Video here. As of this writing, he did not hold a position in any of the aforementioned securities.