Currencies: Seven Charts You Should See

by Bryan Rich

Dear Subscriber,

The currency market, as well as all markets, have been heavily focused on
the U.S. and the Fed's plans for more quantitative easing (QE).

And that's had a huge impact on the dollar and on dollar sentiment.

The question is: Will it last?

There's no disputing that the dollar is the key to making this "reflation
trade" tick. However, there is much dispute over whether the Fed's QE2
plans will work ... whether the strategy will produce demand, thus
inflation, and whether it will have a sustainably devaluing effect on the
dollar.

Despite all of the mania surrounding the dollar in recent months, history
suggests from the Fed's last adventure with QE, that none of
aforementioned desired economic outcomes will ultimately pan out from
QE2. Nor will it affect a draconian outcome for the dollar!

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For a big picture perspective let's take a look at seven key charts to see
what may be in store for the dollar after the QE buzz has faded.

Chart #1:
Long-term dollar cycles

You can see in the chart below the roughly seven-year cycles in the dollar,
dating back to the failure of the Bretton Woods system 40 years ago.
These cycles argue that a bull cycle in the dollar started in March 2008.

That would put the dollar just 2.6 years into its new bull cycle or a bit
more than a third of the way through a typical long-term dollar cycle.

Without question, this recent cycle has been very volatile. But the buck
continues to trade comfortably above its 2008 all-time lows and the lows
of last year, making higher lows along the way — a bullish pattern.

Chart #2:
10-year dollar chart

The chart below shows the roughly seven-year downtrend in the dollar
and the subsequent ascending channel that started in 2008. You can see
that the dollar is now testing the bottom line of this bull channel, an
attractive area to buy the greenback.
A bounce from these levels would project a move toward the top line of
the channel or about 23 percent higher.

Chart #3:
10-year euro chart

This chart for the euro is essentially the inverse of the dollar. And here
too, you can see a long multi-year trend, higher in the case of the euro,
followed by a descending channel.

The euro also is bumping into a technical boundary, one that represents a
downward trending channel. A fall from this level of resistance would open
up a downside for the euro that would be right on target with most
bearish estimates espoused when the euro zone was at the height of its
crisis ... parity versus the dollar.

Chart #4:
Euro's 22-week run
For more on the euro, consider this: The euro is in the midst of its
strongest 22-week run on record, surpassing its prior record surge in
2003 — both areas are noted in the chart below.

What's notable here is that in 2003, a 9 percent correction abruptly

followed this strong climb. From current levels in the euro, a similar
correction would mean a move down to 1.30 over the next few months.

Chart #5:
Pound still weak

Despite all of the fuss over the weak dollar, the British pound is still
trading nearly 25 percent weaker against the dollar since the onset of the
financial crisis three years ago.
And in the chart above, you can see that while the dollar and the euro are
bumping into critical long-term technical areas, so is the pound.

Chart #6:
Yen near all-time highs

Now, for the Japanese yen, the other remaining major currency in the
world ...

This long-term chart in dollar/yen going back 40-years since the failure of
the Bretton Woods system, shows its steady decline.

Even given its recent intervention the pair is nearing all-time lows (lows in
the dollar, highs in the yen). From this chart, compared to the charts of
the euro and the pound, you can see the lion's share of dollar weakness
over the past few years has come from the surging yen.

And now as this dollar/yen exchange rate nears all-time lows, the Bank of
Japan is rolling out its most aggressive deflation-fighting act yet: With
more QE, more fiscal policy and a cut in what's left of its interest rate.

Plus, the Bank of Japan is officially in intervention mode — all things that
make a case for a bounce in dollar/yen.

Finally ...

Chart #7:
Battle against the yuan

With the Fed's QE2 policy officially on the table, the emerging market and
Asian countries that have been waging a fight to keep their currencies
from a runaway surge have already stepped up with more currency
market intervention and talks of capital controls.

And they are doing so because the dollar is weakening. But more
importantly they're reacting because the Chinese yuan is getting weaker
relative to their currencies in the process — a competitive disadvantage
for their export trade.

The key take-away: A grossly weaker dollar is not an economically or

politically acceptable proposition for the world. And trouble for the world
economy represents trouble for the U.S. economy.

So, despite all of the bold projections of a continued rout in the dollar,
these seven charts suggest the exact opposite outcome could be around
the corner.

Regards,
Bryan