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FX Trading – This means war.

The currency wars began a while ago—the financial press is now catching on as a theme fit to print. As we all know, China is at the center of this war and the primary aggressor.

Though undeclared still, with lots of covert activity, much is becoming clear. Even Europe is stepping up to the plate to criticize China. Eurozone officials followed through on yesterday’s report that they would pressure China to free up the yuan so as to reduce “competitive” pressure on American and European businesses.

Euro area policymakers pressed China on Tuesday for a faster appreciation of its currency to help rebalance the world economy but said Chinese Prime Minister Wen Jiabao had differed with them.

[Europe takes the brunt of this as it is squeezed on both sides by China and the US. The US wants currency rolled out like toilet paper to fund global growth; China wants to remain pegged to the advantage of its one-way-bet export model; Japan doing all it can (stepped up asset purchases this morning) to keep the yen from surging more. The money must go somewhere so to the euro it goes (and comdols thanks to, you guessed it, Chinese growth and liquidity) despite the growing periphery warts — Ireland dead in the water; ditto Greece; Spain spiraling lower; and Portugal is on the slide. Shows the power of beneath-the-surface money flow despite what the above-the-surface fundamentals might be hinting.]

Oh, and did we mention most Asian central banks are intervening regularly to keep their currencies from going higher so they can maintain some semblance of competiveness against China (see … back to China again).

So, in retrospect, it is a powerful reason why gold is hitting new all-time highs seemingly every day. It appears gold is telling us currency wars is equivalent to fiat Armageddon. We of course aren’t there yet … but …

Gold Futures Weekly:

It’s been a steady ride higher for gold since the credit crisis of 2008 – albeit a ride on the Space Shuttle.

But of course not all countries are looking to depreciate their currency (at least not at this time). At least they are not actively intervening; it doesn’t mean the like what is happening.

If we look at the gold price in some of these other currencies, it could mean there is still buying power out there.

Gold/AUD Weekly:

Sure, the RBA opted not to raise interest rates today, but they don’t appear concerned that a steadily stronger Australian dollar is posing any problems right now; thanks to being a satellite country of, you guessed it, China. Rate hikes could resume as early as next month.

Gold/CHF Weekly:

Yes, we know the SNB gets antsy time and again, coming in to intervene in the value of the Swiss franc as it strengthens (specifically relative to the euro). But money is flowing their way so their intervention may have slowed things a bit (arguably), but effectively it hasn’t helped much. Real money flow trumps central banks. Period!

And Canada’s not making concerted efforts to depreciate; New Zealand isn’t either. Norway? Nope. In fact, on the Economist Big Mac Index, the Norwegian currency is the most overvalued of them all. Now inching into the 70% overvaluation range against the US dollar — yikes!

Brazil? Ok, maybe Brazil doesn’t want the real to move any higher for a while; they love playing with capital controls and just recently increased a tax on foreign fixed income investment for this purpose. But again, it may be for naught.

And speaking of Brazil, its finance minister came out with some raw comments on currency wars, seemingly fearful of what this building tension between China and the West might bring. Here’s what Leto Research said about it when the comments were made:

Brazil’s Finance Minister Guido Mantega stated the obvious this week, saying that the world is now in an “international currency war.” This is true, and it is frightening. Although in my year-end 2009 forecast I stated that the much-touted G-20 “global governance” would collapse sometime this year, even my worst fears had not gone so far as to predict that the words “international currency war” would be uttered by a government of the G-20.

Brazil is probably twitching a bit as the real pushes up through resistance relative to the dollar. It seems the next logical stopping point is the pre-credit crunch high.

BRLUSD Weekly:

Brazil is no stranger to capital controls, but as is a concern among Japanese officials: does it make sense to step in and intervene when the US dollar has come under such pressure with an endpoint to its slide just anyone’s guess?

Adapted from the immortal words of Dan Patrick:

You can’t stop the Brazilian real; you can only hope to contain it.