Dollar Index vs Euro prints high negative correlation
Last time, we saw some charts in ‘EURUSD and the Dollar Index‘ that showed us an high negative correlation between the Euro and the Dollar Index. In addition:
- Euro occupies 57.6% of the weight in the Dollar Index basket.
- US Dollar/euro share of global foreign exchange market turnover in 2010 was No.1 at 28%
Eight months later, the charts remain very much the same.
EURUSD falls when Dollar Index rise, EURUSD rises when Dollar Index falls
This chart and the one below could explain to us why we have not seen an European quantitative easing so far. Any depreciation in the Euro from a European QE would be matched by a gain in the Dollar Index. One currency’s gain is the other’s loss. This sort of reminds me of binary stars in the galaxy. They exist as a pair and circle each other in an initially peaceful relationship. Due to external forces such as friction, they start to move towards each other. When they come very near, the one with the stronger gravitational field tears material from its neighbour. One becomes very big while the other gets smaller and smaller. Finally the bigger star engulfs the small one and explode into a super nova. A tit-for-tat QE will end with everyone as a loser.
Technical analysis: divergence appears in daily chart
Despite the clear inverse relationship, the daily chart is printing a divergence. Despite recent gains in the Dollar index with new highs, EURUSD has not matched with equally strong movement downwards (no new lows). These suggests a few things:
- Recent Dollar Index gains came at the expense of the Japanese Yen with strong gains in USDJPY bearing in mind Japanese Yen is the No.2 currency in the Dollar Index basket with 13.6%weight. It is also No.2 in terms of share of global foreign exchange turnover at 14%. The loss in the Yen took the pressure off the Euro.
- EURUSD is quite strong so if the Dollar Index turns South, we could see a strong rebound in EURUSD.
- EURUSD is lagging for reasons not shown in the chart but will catch up Southwards very soon if the Dollar Index continues to climb.
Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.
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