Update on EURUSD: Dec 3, 2014

Updated Dec 3, 2014:

EURUSD has seen a sharp drop over the past nine months and is now approaching a likely point of reversal.  Will Draghi’s jawboning about massive easing finally lose its mojo?

The weekly chart shows the .886 Fib approaching at 1.2263.

2014-12-03 EURUSD weekly cuThis Fib level intersects nicely with a trend line connecting three previous lows shown here on the monthly chart.

2014-12-03 EURUSD monthlyThe series of lower highs and higher lows has created a triangle that could go on for years.  The apex is out around the end of 2018!  That would support the idea of a bounce in the coming weeks.  But, what would it mean for equities?

I’ve overlaid the SPX and added a monthly chart of correlation between EURUSD and SPX.  No big surprise, but the correlation ratcheted higher beginning in 2009 when QE first arrived on the scene.  Negative correlations were progressively less negative, and the positive correlations lasted longer.

2014-12-03 EURUSD v SPXInterestingly, we saw the first instances where bounces from very negative correlations did not produce equity sell-offs. In the past, they nearly always occurred.

Also, note the rising white channel.  As central bank easing increased, the predictive power of the channel faded.  So, instead of reversions to the mean, we see the pair propped up at the red, dashed trend line again and again.  The bounce at “2” up to the .75 line could be justified, but the bounce at “3” in mid-2012 smacks of intervention.

The burning question from this chart is whether that TL will also hold at point “4.” Clearly correlations will bounce back at some point, but this could be EURUSD and SPX both rallying higher, or both falling lower.

At this point, I’d imagine they’ll both track higher.  I don’t believe central banks, after all they’ve done, will suddenly throw in the towel.  And, the ECB has thus far been unable to follow through on their promises.


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