Wednesday, August 21, 2013

Treading Water with the Euro & USDX

Long-term, we remain in the euro's corner until proven otherwise. With that said, they have both treaded water for the better part of 2013 - trading momentum drives while trending in the same direction. If you were to look back over the long-term at the relationship between the euro and the US dollar index, you would note that this year has exhibited the largest and longest correlation drop from the typically strong inverse relationship held between these two assets. 
Our general and simplified take, is that this prolonged period of trending listlessness between the euro and dollar will end with another major inflection point. Until proven otherwise, we see the dollar rolling over into 2014. 

Although the correlation environment between asset classes is invariably unique, we continue to contrast the 2004 timeframe as a reference guide to when the Fed pivoted away from accommodative monetary policies. 

Over the short term, the USDX is currently expressing another positive momentum set-up that may result in a retracement bounce - similar to the rally in the USDX in the back half of July 2004.