Thursday, April 15, 2010

What I Am Watching (Part 2): EURUSD

The EURUSD cross rate has been bouncing around its weekly key pivot point for several weeks now. See figure 1, a weekly chart of the EURUSD.

Figure 1. EURUSD/ weekly

Key pivot points are identified with the large black dots over the price bars. These are areas of support and resistance. The most recent pivot comes in at 1.35447; a weekly close over this level suggests that Euro will gain strength against the Dollar or the Dollar weakens against the Euro. This has yet to happen although the Euro has been probing higher.

Why is this chart important? Weakness in the Dollar continues to imply higher prices for risk assets, such as equities and commodities. The Dollar remains negatively correlated to equities. I believe it is that simple. Recent Dollar weakness has been highly correlated with equity strength. See figure 2 a daily chart comparing the Power Shares DB US Dollar Bull (symbol:UUP) (blue line) to the S&P Depository Receipts (symbol: SPY) (black line). The red vertical lines identify peaks and troughs in the UUP and these coincide nicely (and inversely) with swings in the SPY.

Figure 2. UUP v. SPY/ daily


D-man said...

this is somehow opposite to "inflation index" headwinds for equities; that index is in the extreme zone (headwind for equities). A weakening dollar will strengthen that inflation index even higher, but in the same time is equities positive because dollar weakness. Put into the equation extreme bullishnes which is a headwind as well and I understand nothing out of this.

thanks for the post!

horeman said...

not sure about the correlation between the USD and equities. Yes, when the dollar declines, equities/comm rise, however, the inverse has not been true since the dollar has strengthened. In fact, and amazingly, the markets have completely ignored the strength in the dollar. Take a look at the link for a chart. It is much easier to compare UDN (inverse of UUP) and SPX since the correlation is direct.

when nothing makes sense, then you are being toyed in this f;n market!

Guy M. Lerner said...


Would you agree that my use of these pivots -that I have derived - tends to be reasonably precise? Not always correct but better than most tools?

Remember, these pivots are signals - like a MACD cross- but in my opinion, better.

If there is a close over a key pivot that generally means it is time to get long that asset; I cannot change the fact that it happened; the story that you or I want to put to it is just that.

I have a friend who believes that stocks go higher and bonds yields go lower in the coming months; that is a scenario that differs from the consensus; most think as bonds as safe havens so if bonds get a bid, then stocks must be doing poorly...but he believes stocks go higher and bonds go higher....that's his story but we shall see what the price action tells us

The close over the pivot has yet to happen on the EURUSD and yes, the implications as WE have suggested don't jive with the headwinds facing equities - but I cannot change the fact that EURUSD closed over a pivot that I deem to be bullish

In the end, I try - and it is very hard to do - to put more conviction into what I see on that graph than what I think might happen. Either way I go about it, I am sure to get some wrong, so by looking at the graph, I take myself out of it.

Does that make sense?

Guy M. Lerner said...


I went back and looked at UUP v. SPY and UDN V. SPY

In the run up to Dec 09, UDN and SPY were very tightly correlated; since then, UDN has been going down while equities have gone down and then up; so over the last 3 months they have diverged in the general sense

But, looking at the week by week swings, it is still pretty clear that when the Dollar goes down the SPY goes up

thanks for posting

D-man said...


"Would you agree that my use of these pivots -that I have derived - tends to be reasonably precise? Not always correct but better than most tools?"

Totally agree, I said already I prefer the pivots to other tools. Simple and effective.

All I wanted to do is combine the explanations in the last 2 posts (EUR/USD and Time to short S&P) as they seem to oppose one another in the "logic behind those". If EUR closes above pivot it will help equities but also the components of the "inflation index"; on the other hand the "inflation index" here is a headwind for equities so do you agree it's a bit confusing? I mean one of the two will win, right? :)

One thing I'm sure about: equities will go only up.

Anyway, I appreciate your post as always.