While recent attention surrounding the EUR/USD slide has focussed upon short-rate spreads, relative equity pressure has also emerged.
After providing EUR/USD support throughout 2013, the side move in the Dax/Dow ratio in 1H 2014 appears to be giving way to renewed downside. Indeed while this ratio’s latest move lower has yet to break its March low, the shifting macro-outlook argues such a move is now feasible in coming weeks.
Looking forward, the key a continued move lower (and hence additional EUR/USD downside) will be how investors perceive the trade-off between intrinsic growth and accommodative monetary policy.
Previously, markets appeared to adopt a ‘bad news is good news’ approach to economic data – i.e. given potential to prolong loose monetary policy. Recent equity price-evidence however suggests this counter-intuitive behaviour may be changing. If we perceive this change correctly, the ECB’s first TLTRO (18th September) need not be an obstacle to further equity pressure.
We remain short EUR/USD as a trade recommendation.
*CA holds a strategic EUR/USD short from December from 1.3780 with a revised stop at cost.
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