The appetite for risk looks healthy going into the end of 2013. Any wrinkles were ironed out by Fed chair nominee Janet Yellen, who reassured weary investors that the U.S. central bank will maintain the stimulus, and by signs of ambitious economic reform in China.
The impact of these recent factors had a relatively common impact on both the Dow Jones Industrial Average (.DJI) and the euro/dollar (EUR=). This suggests that the correlation of these key markets will continue at higher levels into the end of the year after whipsawing in the previous three years.
Source: Thomson Reuters Eikon
The .DJI advanced in 21 of the past 26 weeks, which was an enormous feat, and looks poised for further gains. Its immediate target is 16,064, which is the 1.382 Fibonacci projection of the uptrend started in March 2009. The next objective is 16,892. Only a close below 14,409 would signal trouble for the .DJI, but this is unlikely.
The chart of the EUR= paints a different long-term picture. While it’s been making higher lows since 2010, it’s also been forming lower highs. Essentially, we are looking at a massive symmetrical triangle, denoting the undercurrents affecting the Eurozone.
Lower inflation enabled the ECB to cut borrowing costs in an effort to stabilize the regional economy, but there is little expectation for lowering the unemployment rates. The rate cut boosted regional equity indexes, but, of course, not EUR=. With this in mind, the EUR= should trade in a range bordered by Fibonacci retracement levels at 1.3124 and 1.4373. Only a break outside this range would be a game-changer.
If no extraneous factors enter the fray, the correlation between the .DJI and EUR= should remain relatively high into the end of the year.
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