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DAX & CAC Technical Outlook: Italy Turns Euro Correlation on its Head

DAX & CAC Technical Outlook: Italy Turns Euro Correlation on its Head

2018-05-30 08:16:00
Paul Robinson, Currency Strategist
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DAX/CAC Technical Highlights:

  • Euro tailwind no longer as Italy weighs on FX & stocks
  • DAX turn lower to be put to the test
  • CAC sell-off to be tested on recovery soon

For a broader fundamental and technical outlook on major markets, and to see how our Trading Opportunities for 2018 are performing, check out the DailyFX Trading Guides.

Euro tailwind no longer as Italy weighs on FX & stocks

Political upheaval in Italy has taken down both the euro and Euro-zone stocks in recent sessions with force, splintering the nice, neat inverse correlation previously in place. Not long ago we were discussing the tailwind the euro, in addition to firming global risk appetite, was providing for the DAX & CAC.

The turnabout, regardless of its cause is no surprise on this end; this is what we had to say in regards to placing too much emphasis on correlations – “It’s worth heeding caution when doing this [analyzing correlations], as correlations have a tendency to change without warning.”

Indeed, not only has the relationship between the euro and stocks changed, but the two-week correlations have gone from -96% (DAX/EUR) and -92% (CAC/EUR) to current levels of +88% and +95%, respectively. From one extreme to the other.

What does this mean? It means it might be best to simply focus on the indices themselves for now, but be mindful when trading both the euro and the indices that they are trading together, so when establishing positions, you need to consider how they will interact with one another. For example, taking directional bets in the same direction right now is effectively one larger position.

See this guide for 4 ideas on how to Build Confidence in Trading.

DAX turn lower to be put to the test

The DAX turned down below the 12900/1300 region we were once looking at as resistance earlier this month. A bounce from support around a swing-high created in April (12600s) and the 200-day will have attention focused on whether that area will become resistance and potentially mark a lower-high from the monthly high.

DAX Daily Chart (w/2-wk Euro Correlation)

dax daily chart with 2-week correlation to the euro

CAC sell-off to be tested on recovery soon

The move to fresh decade+ highs was short-lived for the French benchmark. The turn lower came from right around a top-side trend-line passing over from May 2017. There is some support around 5364. A turn higher from here or a little lower could be telling. A failed attempt to recover could put the index in position to continue rolling over towards the trend-line from June 2016.

CAC Daily Chart (w/2-wk Euro Correlation)

CAC daily chart with 2-wk correlation to the euro

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---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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