As the EUR continues to pullback from prior highs vs. the dollar of 1.1450, the Dax is off to a flying start this week. In the last 2 days, the Dax is up more than 3%, and is testing its 50-day sma at 11,822, the highest level since the end of April. If the index continues to rally at this current pace then we could see back to 12,000, and maybe the record high of 12,390.
The Dax can thank the EUR for its recent rise, as the negative correlation between the two has surged in recent days. To put this into some perspective:
- Since the start of this year the Dax and EURUSD has had a negative correlation of -0.36.
- This has risen to -0.51 since the start of May.
- Since 10th May this correlation has surged to -0.66.
Thus, when EURUSD falls, the Dax rises 66% of the time. Read our technical update on the Dax HERE, but the fundamental reason for the increase in the Dax is closely tied to the EUR for the following reasons:
- EUR weakness helps Germany’s exporters, including its car manufacturers, which are its best performers on Tuesday.
- The EUR has weakened on the back of comments from ECB officials that its QE programme will not end prematurely, and that the ECB may front-load asset purchases this summer, which could heavily on the EUR in the coming weeks.
- Stock markets love the liquidity provided by QE, hence why Europe’s largest index is rallying on the back of news that the ECB’s programme is here to stay.
To conclude, if you are trading the Dax, make sure you watch what the EUR is doing, a break below 1.10 in EURUSD could help the Dax regain recent record highs.