The Euro Trades Through Resistance!

As I suspected in yesterday’s Pfennig, the dollar selling and the pause in the currency rally that was caused by Japanese intervention, has not continued… Yes, the currencies, for the most part, are back on the rally tracks versus the dollar this morning. The euro (EUR) is leading the pack, just like the old days, eh?

Of course, I was all ready this morning to tell you why the euro spent the day yesterday going up and down like a kid on a pogo stick… But then I came in this morning, and turned on the currency screens to see the euro trading past the resistance levels I was told about yesterday! But since I was all prepared to tell you about it, I’m going to do so anyway, but keep in mind that the euro blasted through the line of resistance overnight…

Yesterday saw a lot of grinding up and down by the currencies.

The biggest “grinder” was the euro. The single unit would fall to 1.2960, and then bounce to 1.30 and change, and it did this over and over again throughout the day.

My chartist friend sent me a note, and said that there is a resistance line drawn off of the high last December 2009 at 1.5144, and it hits right at 1.3035… So, to him – and I guess to me, a bit – that explains the grinding up to 1.3030 and then the fall back over and over again.

I like mixing technical stuff with fundamentals when it makes sense to me… I’ve said that the euro isn’t out of the woods yet, and so a run up to 1.30 gets to be pretty “pricy” to me right now… So, it will take a strong move through 1.3035 for the euro to move to the next level of 1.31… At least that’s what the charts say!

Well… So much for those charts, as the euro is trading right now at 1.3080!

OK… I said two times above, that the currencies, for the most part, are rallying… For the most part it is taken up by the Brazilian real (BRL), and New Zealand dollar (NZD), both of which saw some heavy selling overnight…

We’ve seen this in Brazil for about a year now, with the Brazilian Central Bank (BCB) making it quite clear that they do not condone the real at the lofty levels it stood yesterday 1.70… The rumor in Brazil was that the BCB was making calls, and checking with banks to see what their appetite was for taking on the real that the BCB was selling for dollars… No such trades took place, but the rumors were very good at moving the real from 1.70 yesterday to 1.7236 today…

I’ve said this each time the BCB does this kind of thing to weaken the real… These are short-term plays, and only give investors the opportunity to buy at cheaper levels… The BCB is doing investors a BIG favor, folks… I mean, look, the proof is in the pudding that their tactics haven’t worked… A year ago, real was 1.8250, and even with the selling yesterday it stands today, one year later, at 1.7236… That’s a better than 5% return, plus the 6% interest the currency pays, and you’ve got an 11% return… In a currency that the government tries to keep weak!

OK… So maybe 11% isn’t what you’re looking for… Hmmm… Oh well, I try… You see, this is a “hedge” in your portfolio against further dollar depreciation… So… That’s pretty much gravy, eh?

And… Let’s not forget The Swiss National Bank (SNB), which tried for months to stem the appreciation of the franc (CHF), only to see the franc reach parity to the dollar again! The SNB’s intervention was useless…

The other “for the most part” currency is the New Zealand dollar/kiwi, which has sold off the past three nights. Last night’s sell-off was keyed by Reserve Bank of New Zealand (RBNZ) Governor Bollard, who left rates unchanged, and… Basically signaled slower rate increases. The reason that the Governor has been placed on rate hikes in New Zealand is that the government is still trying to determine the effects the recent earthquake might have on the economy.

You know me… I look for other things to come from stuff like that… Remember when Thailand had the Tsunami? Well, this is quite the same… After the dust settles, there is rebuilding that has to take place, and that will be a good thing for the economy. So… Kiwis might be getting sold now… But, it won’t be something that continues months from now… So either batten down the hatches, or look to buy more, eh?

Alrighty then… I see where US Treasury Secretary Geithner told the press that there are ways to get China to allow a faster upward movement in the renminbi (CNY). Hmmm… Reminds me of a skit, where the military man is interrogating his prisoner, and says, (in your best foreign accent), “We have ways to make you talk”… HA!

I also see that the US is going to use pressure through the World Trade Organization (WTO) to make China move faster with their currency appreciation… Because, folks… According to our government, “It’s all China’s fault” that we have deficit spending to the moon…

I’m all for renminbi appreciation, don’t get me wrong here… However, only if it makes sense for the Chinese… And only then… Apparently, it is making some sense for them right now, because the renminbi is trading this morning at the strongest level versus the dollar since 1993…

Well… Let’s see… It’s a Thursday, so… That means the Initial Weekly Jobless Claims will print today. Last week, we saw the report print at a much lower number of claims than we had seen in some time. It turns out that with the Labor Day Holiday there were quite a few states that didn’t report their claims, and… The government (Hey! We’re here to help!) “estimated” the claims for the states… So, last week’s report was bogus, to borrow a word from Bill and Ted…

The data cupboard has more for us this morning, than just Weekly Jobless Claims… At the 7:30 bell this morning we’ll see August PPI (wholesale inflation), the second quarter Current Account Deficit, and the TIC’s data (net foreign purchases) for July. So… A plethora of data to sift through today for the markets…

I don’t believe any of it will be good for the economy. How it affects the dollar is the question… In the old days when fundamentals ruled, soft data would cause a dollar sell-off…

The TIC’s data continues to get swept under the rug each month, with the markets not paying much attention to the report. Well… Not me! Today, we’ll see the July numbers… Well, you have to go back to see what our trade deficit was in July, and according to the government it was $42.8 billion… The net purchases of Treasuries by foreigners (TIC’s) is expected to be around $47 billion, which would mean, that for once, the deficit was financed appropriately, and the can didn’t have to get kicked down the road further.

Well… While I was typing that last paragraph, the euro traded up and over the 1.31 handle!

Gold and silver had a good trading day and overnight sessions with gold posting yet another all-time record high, as it has added $7 to its figure this morning!

Then there was this… There is a story on CNN/Money featuring some banks that said “NO” to TARP… Too bad they didn’t talk about EverBank… EverBank said “NO” to TARP, and has never looked back… I’m sure the Big Guys at the top of the house at EverBank are glad they passed on that offer from the government to take TARP money… Here’s a snippet from the story…

Banks aren’t the problem. Washington is. David Kemper (CEO of Commerce Bancshares) said the backlash against the industry is “unfortunate” and that the Dodd-Frank financial reform bill passed earlier this year is an example of “overregulation.”

He added that the financial reform bill didn’t address the two biggest problems that contributed to the 2008 crisis and still exist: Many banks were too-big-to-fail and the excesses in the housing market.

Yes… And what about financial reform to fix the troubled – and government-backed – mortgage financing giants Fannie Mae and Freddie Mac? Too bad Dodd-Frank didn’t see that as a need!

To recap… The currencies, for the most part, are back on the rally tracks this morning, with two currencies not participating: Brazilian real and New Zealand kiwi. Both have the government to blame for their sitting on the sidelines and not participating in the currency rally versus the dollar. The euro has traded through a line of resistance and moving higher to 1.31. And the US government is back to blaming China for it’s problems, and believes that a stronger renminbi will be the cure to all that ails the US… They are so wrong!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning