Remember When Purchasing Power Parity Drove Currencies?

• Posted by Greg Harmon
• on September 28th, 2011

The currency markets have been bouncing around like ping pong balls lately as the latest headline about Greece or Italy or even France. It used to be that you learned in business school that purchasing power parity would eventually drive currencies to their fair values relative to each other based on interest rates and growth prospects. Maybe they still teach that dribble, it has been a while since I was there. But at this point even an economist can see that pricing a Big Mac measured in each currency as a guide to future valuations of the currency does nothing for you except get you hungry. Now it is all about fear. Just look at the charts for the the currency ETF’s the Currency Shares Euro Trust ($FXE), Currency Shares British Pound Sterling Trust, ($FXB), and Currency Shares Japanese Yen Trust ($FXY).

Currency Shares Euro Sterling Trust, $FXE

The Currency Shares Euro Sterling Trust, $FXE, is at eh center of the action and since the beginning of September has dropped over 7.5% from 145 to 134, before bouncing. Technically it broke through support at 139.50 from a descending triangle and has a target lower of 130.40. The Relative Strength Index (RSI) is skipping along the 30 level but the MACD is looking to cross higher. Perhaps a bounce to come but the trend is lower.

Currency Shares British Pound Sterling Trust, $FXB

Turning to the Currency Shares British Pound Sterling Trust, $FXB, you might expect a bit more strength. But it also fell over 7.5% from its high before bouncing. It also shows a RSI that is having a hard time, falling back toward the 30 line again and a MACD that is diverging, and heading towards a cross higher. Again maybe a bounce within the downtrend. But the trading world does not seem to care that there is a large body of water between the UK and Europe. In fact the charts for the ETF’s for the Australian Dollar, Canadian Dollar, Swiss Franc, Mexican Peso, Swedish Krona, Chinese Yuan and Emerging Currencies all look like this. So where is the strength?

Currency Shares Japanese Yen Trust, $FXY

The Japanese Yen and the US Dollar are the lone strong currencies. The chart for the Currency Shares Japanese Yen Trust, $FXY, above shows it holding strong during the same period when the other ETF’s were falling. Technically it is creating an ascending triangle using the 50 day Simple Moving Average (SMA) and the top rail resistance at 129.40. But it has signs of tiring as it sits there. The RSI remains bullish but is pointing lower while the MACD has just crossed negative but barely. Will it fall and leave the US Dollar as the lone strong currency or will it break through resistance and head higher? The answer no doubt lies in the headlines out of Europe over the next few days.

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