FX Update: Higher Stocks Still Supportive Of Higher EURUSD

To examine EURUSD from an alternative perspective, we have decided to probe the correlation between the Deutsche Bank stock price and the currency cross. Why, you may ask? The reason is that mainstream and Tier-1 strategists are still telling investors that they expect year-end EURUSD forecasts to be in the region of 4-8 figures below current prices. When asked how this will be reflected in stock markets, however, a majority of the same analysts seems to agree that equities have another 5-10 percent to go on the upside.

This update is not to disagree or even take a stand on where equities will be by year end, but simply to refute that unless the correlation for the past decade between Deutsche Bank, used here as a broad proxy for European stocks, and EURUSD is to diverge significantly, this mainstream scenario among the analyst community is simply not going to materialise.

EURUSD and Deutsche Bank continue to move in close unison

Easy money on global scale still pumping EURUSD and stocks higher

As we have written in prior reports, we are true believers in the “if it ain't broke, don’t fix it” approach. We still have the double bottom base pattern at 1.2750 and now we need a close above the 1.3833 level, which would open up for 1.4087, the double bottom target mentioned in our earlier reports. This basically means that we expect that both the euro and equities will benefit through the rest of this year from an overall acceptance by market participants that tapering of asset purchases by the Federal Reserve will not start until approximately March 2014.

The above is also further supported by a prior report that we wrote about the dollar smile theory, in which subdued growth and expansionary monetary policy in the US is still set to lead EURUSD higher. So, if EURUSD is to hit the mainstream target of 1.3000 or lower, we would expect this to actually be as a result of a true and sustained reversal in the currently positive risk sentiment. At this time, we see the odds of such a sentiment reversal in the next two-month period to be rather slim.