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Upside Targets for the Euro and the Effect on Gold and Bonds

|Includes: FXE, SPDR Gold Trust ETF (GLD), TLT
We've seen quite the rally in the Euro currency since bottoming in June.  Taking a look at the Euro/Dollar Forex (EURUSD) price chart below, you can see that the significant downtrend in place since December 2009 has clearly been reversed.  The Euro bottomed out just below 1.20/Dollar, which is a key long-term level that I've previously written about (Euro was in the 0.80 to 1.20 range for some time after it initially began trading).

Since early-June, we've seen the Euro rebound sharply.  Pullbacks have been constrained around the Middle bollinger Band and the Middle Acceleration Band.  Also, 30-unit Percent R (our preferred BigTrend Percent R setting) rebounded after mid-levels and has since broken into bullish territory above the 80 level for the first time since December 2009.

I've placed a Fibonacci Retracement on this chart covering the December 2009 highs and the June 2010 lows.  This gives an upside target range of 1.31 to 1.39 (which I would round to 1.30 to 1.40, as I prefer key strike price levels), which is a 38.2% to 61.8% retracement of the selloff.  The key mid level target is the 50% retracement, just above 1.35 (1.3508).  Notice that we traded in this range from early-February to early-May, so a return into this 1.31 to 1.39 range would not be unusual.

EURUSD Daily Chart

Now, there have been some unusual correlations in 2010, specifically among Gold (NYSEARCA:GLD), Bonds (NYSEARCA:TLT), and the Euro (NYSEARCA:FXE).  Take a look at the following chart, which shows the relative 2010 performance of these securities using these ETFs (GLD in yellow, TLT in blue, FXE in red).  The first thing to note is the strong correlation between Gold and Bonds this year.  This is not a normal historical correlation, as Gold is often seen as an inflation hedge, while Bonds tend to sell off (yields rise) when inflation looms.  It looks to me as if there is some broad-based "flight to quality" into these two assets.  Additionally, it's possible that a "stagflation" (low growth with inflation) environment is causing them to be linked.

But there also is an inverse correlation this year with the Euro versus Gold/Bonds.  You can see that the downtrend in the FXE accelerated in April, just as the uptrend in Gold & Bonds began to sharpen.  Now we have a dichotomy developing, as FXE is rebounding nicely, while Gold & Bonds haven't seen as much of a direct inverse move this time around. 

GLD vs TLT vs FXE Performance Chart

Bottom line to me in terms of the correlative relationships:  GLD has moved lower since peaking in June, and I would anticipate more relative downside as the FXE continues to move higher into its expected trading range.  It's likely that some funds had on Long Gold/Short Euro trades that are being unwound and reversed.  TLT hasn't yet rolled over as much -- it's possible that the relationship with Bonds and these other securities is breaking down.  But if European currency continues to become more attractive to traders, then U.S. bonds (and stocks) may see some lesser allocations.

Disclosure: No positions.